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Political Instability, Foreign Investment and Growth in Proprietary Economies



Developing country leaders typically resemble proprietors more than benevolent social planners, i.e., they are powerful individuals pursuing their own interests while they remain in power. We model growth in a "proprietary economy" facing each period an endogenous probability of "political catastrophe" that would hurt foreign investors and extinguish the proprietor's wealth extraction ability. We provide theory in which domestic capital exhibits a bifurcation point determining economic growth or shrinkage. With low initial domestic capital the proprietor plunders the country's resources and the economy shrinks, even when shrinkage is not socially optimal. With high initial domestic capital the economy grows faster than is socially optimal.

Suggested Citation

  • Jody Overland & Michael Spagat, 1998. "Political Instability, Foreign Investment and Growth in Proprietary Economies," Royal Holloway, University of London: Discussion Papers in Economics 98/8, Department of Economics, Royal Holloway University of London, revised 17 Feb 1998.
  • Handle: RePEc:hol:holodi:9808

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    More about this item


    Political Economiy; Growth; proprietary Economy; Bifurcation; and Political Catastrophe;

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • H - Public Economics


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