Expropriation Risk and Technology

17 Pages Posted: 26 Jan 2010 Last revised: 11 Nov 2011

See all articles by Marcus M. Opp

Marcus M. Opp

Stockholm School of Economics - Department of Finance; Swedish House of Finance

Date Written: March 14, 2011

Abstract

This paper develops a unified framework to analyze the dynamics of firm investment in countries with poor legal enforcement. The firm's technology edge over the government generates endogenous property rights. Industry variation in the technology gap predicts a sectoral pecking order of expropriations. Long-run investment distortions may be Pareto superior relative to persistent investment at the static optimum. The dynamics of investment and transfers depend on whether incentives (backloading) or efficiency (frontloading) concerns dominate at the initial division of surplus. An increase in government efficiency may reduce its welfare. The model provides a technology-driven rationale for the widespread use of conglomerate structures in emerging market countries.

Keywords: Expropriation Risk, Foreign Direct Investment, Dynamic Contracting, Property Rights, Self-Enforcing Contracts, Principal-Agent Models, Political Risk

JEL Classification: D86, D23, F 21, F23, F52, G38

Suggested Citation

Opp, Marcus M., Expropriation Risk and Technology (March 14, 2011). Journal of Financial Economics (JFE), Vol. 103, No. 1, pp. 113-129, 2012, Available at SSRN: https://ssrn.com/abstract=1541293

Marcus M. Opp (Contact Author)

Stockholm School of Economics - Department of Finance ( email )

SE-113 83 Stockholm
Sweden

Swedish House of Finance

Drottninggatan 98
111 60 Stockholm
Sweden

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