Expropriation Risk and Technology
Marcus M. Opp
University of California, Berkeley - Finance Group
March 14, 2011
Journal of Financial Economics (JFE), Vol. 103, No. 1, pp. 113-129, 2012
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.
Number of Pages in PDF File: 17
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, G38Accepted Paper Series
Date posted: January 26, 2010 ; Last revised: November 11, 2011
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