Can a Sovereign Protect Investors from Itself? Tribal Institutions to Spur Reservation Investment
57 Pages Posted: 16 Jul 2008 Last revised: 22 Apr 2012
Date Written: 2004
A bilateral danger of underperformance exists when two parties sink investments with payoffs dependent on the behavior of the other. There are five general categories of defense against that danger: (1) Legal action against a misbehaving co-investor; (2) Reliance on a reputation for non-opportunistic behavior; (3) Agreement by the party with the less substantial reputation to modify the relative payouts, thus paying the partner a risk premium; (4) Vertical integration that makes a partnership unnecessary; and (5) Forgoing the opportunity altogether. A sovereign can be sued only if it permits that outcome, and must invest in a reputation that assures the partner that it will permit suit. Thus, for a sovereign the first two categories merge. Such a reputation can arise from a history of successful meritorious suits by aggrieved co-investors. But many tribal reservations are small and poor, offer few attractive investment opportunities, and hence exhibit thin histories on point. Consequently they more often pay high risk premiums than similar non-tribal investors, more often vertically integrate where others rely on experts, and more often forego potentially valuable investments altogether. We explore ways to ameliorate those disadvantages and thus improve returns from assets held by or on reservations.
Keywords: tribal economic development, reservation economic development, American Indian economic development, institutions for economic development
JEL Classification: A13, D20, D23, D60, D72, D73, E60, G14, G18, H10, J15, K20, O10, O20, P00, P40, R00, Z10
Suggested Citation: Suggested Citation