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Institutions, Volatility and Investment

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  • Besley, Tim
  • Mueller, Hannes

Abstract

Countries with strong executive constraints have lower growth volatility but similar average growth to those with weak constraints. This paper argues that this may explain a strong reduced-form correlation between executive constraints and inflows of foreign investment. It uses a novel dataset of Dutch sector-level investments between 1983 and 2010 to explore this issue. It formulates an economic model of investment and uses data on the mean and variance of productivity growth to explain the relationship between investment inflows and executive constraints. The model can account for the aggregate change in inflows when strong executive constraints are adopted in terms of the reduction in the volatility in productivity growth. The data and model together suggest a natural way of thinking about country-specific heterogeneity in investment inflows following the adoption of strong executive constraints.

Suggested Citation

  • Besley, Tim & Mueller, Hannes, 2015. "Institutions, Volatility and Investment," CEPR Discussion Papers 10373, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:10373
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    Citations

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    Cited by:

    1. Tarek A Hassan & Stephan Hollander & Laurence van Lent & Ahmed Tahoun, 2019. "Firm-Level Political Risk: Measurement and Effects," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(4), pages 2135-2202.
    2. Marina Diakonova & Luis Molina & Hannes Mueller & Javier J. Pérez & Cristopher Rauh, 2022. "The information content of conflict, social unrest and policy uncertainty measures for macroeconomic forecasting," Working Papers 2232, Banco de España.
    3. Timothy Besley & Marta Reynal-Querol, 2017. "The logic of hereditary rule: theory and evidence," Journal of Economic Growth, Springer, vol. 22(2), pages 123-144, June.
    4. Morelli, Massimo & Foarta, Dana, 2020. "Equilibrium Reforms and Endogenous Complexity," CEPR Discussion Papers 15136, C.E.P.R. Discussion Papers.
    5. María Clara Arroyo, 2018. "The Effect of Executive Constraints on Reform Implementation: An Empirical Analysis," Documentos de Trabajo (working papers) 0118, Department of Economics - dECON.
    6. Kuo, Nan-Ting & Lee, Cheng-Few, 2024. "Public governance and the demand for corporate governance: The role of political institutions," Research in International Business and Finance, Elsevier, vol. 67(PB).
    7. Alvaro Forteza & Juan S. Pereyra, 2021. "Separation of powers with ideological parties," Journal of Theoretical Politics, , vol. 33(3), pages 333-382, July.
    8. Loris Rubini, 2019. "Bribes in the Business Cycles," Review of Economics and Institutions, Università di Perugia, vol. 10(1).
    9. D. V. Shcherbakova & A. A. Medved, 2019. "Factors of Investment Attractiveness of Russian Regions," Administrative Consulting, Russian Presidential Academy of National Economy and Public Administration. North-West Institute of Management., issue 11.
    10. Milan Trajkovic, 2022. "Impact of macroeconomic stability on private fixed investments in selected countries of Central and Southeast Europe," Working Papers Bulletin 7, National Bank of Serbia.

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    More about this item

    Keywords

    Foreign investment; Volatility; Political risk; Executive constraints; Democracy;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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