London School of Economics EOPP: Economic Organisation and Public Policy Programme LSE
EOPP: Economic Organisation and Public Policy Programme

Abstract for:

Private Investment and Political Uncertainty

David Stasavage, July 2000
Paper No' DEDPS 25: | Full paper (pdf)
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Keywords: Political institutions; private investment, credible commitment, quantile regression.

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This Paper is published under the following series: Development Economics
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Abstract:

Recent theoretical and empirical work has demonstrated a clear negative link between macroeconomic and political uncertainty and levels of private investment across countries. This result raises the question what institutions might help reduce this uncertainty, in particular by allowing host governments to limit their own possibilities to act opportunistically with respect to investors. Some have argued that governments might benefit from joining a multilateral investment agreement, but there remain doubts both about the enforceability and the desirability of such an accord. An alternative possibility, proposed in a seminal article by North and Weingast (1989), is that political institutions characterized by checks and balances can allow governments to credibly commit not to engage in ex post opportunism with respect to investors. In this paper I propose a modified version of this hypothesis and test it using new cross-country data on political institutions. I also use a quantile regression technique which allows the estimated effect of political institutions to vary across countries and over time.