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Measuring Risk: Political Risk Insurance Premiums and Domestic Political Institutions

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  • Nathan M Jensen

    (Washington University)

Abstract

There is a renewed interest in political science on how political risk affects multinational corporations operating in emerging markets. Most existing studies suffer from data problems where researchers can only offer indirect evidence of the relationship between political institutions and political risk. In this paper I utilize a new data resource to explore how domestic institutions affect political risks for multinationals. Utilizing price data from political risk insurance agencies I test how domestic political institutions affect the premiums multinationals pay for coverage against 1) expropriations and contract disputes and 2) government restrictions on capital transactions. I find that constraints on politicians lead to marginally lower expropriation and transfer risks. Democracy, on the other hand, greatly reduces expropriation risk but has no impact on transfer risk.

Suggested Citation

  • Nathan M Jensen, 2005. "Measuring Risk: Political Risk Insurance Premiums and Domestic Political Institutions," International Finance 0512002, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpif:0512002
    Note: Type of Document - pdf; pages: 45
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/if/papers/0512/0512002.pdf
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    References listed on IDEAS

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    Cited by:

    1. Población, Javier & Correia, Ricardo & Restrepo, Diana, 2012. "Political risk and corporate investment decisions," DEE - Working Papers. Business Economics. WB 13114, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    2. Violeta Iftinchi & Gheorghe Hurduzeu, 2016. "The place of Political Risk Insurance in the political risk management strategy of multinational corporations," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 19(60), pages 201-212, June.
    3. Marina Azzimonti-Renzo & Pierre-Daniel G. Sarte, 2007. "Barriers to foreign direct investment under political instability," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 287-315.
    4. repec:pal:gpprii:v:43:y:2018:i:3:d:10.1057_s41288-018-0085-4 is not listed on IDEAS

    More about this item

    Keywords

    FDI; political risk; expropriation; insurance;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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