Political Risk Aversion

27 Pages Posted: 13 Oct 2009

See all articles by Laura Valderrama

Laura Valderrama

International Monetary Fund - Monetary and Capital Markets Department

Date Written: September 2009

Abstract

This paper studies the effect of individual uncertainty on collective decision-making to implement innovation. We show how individual uncertainty creates a bias for the status quo even under irreversible voting decisions, in contrast with Fernandez and Rodrik (1991). Blocking innovation is rooted in the aversion to the potential loss of political clout in future voting decisions. Thus, risk neutral individuals exhibit what we call political risk aversion. Yet individual uncertainty is not all bad news as it may open the door to institutional reform. We endogenize institutional reform and show a non-monotonic relationship between institutional efficiency and the size of innovation.

Keywords: Corporate governance, Corporate sector, Economic models, Labor mobility, Political economy, Productivity, Technology transfer, Voting power

Suggested Citation

Valderrama, Laura, Political Risk Aversion (September 2009). IMF Working Papers, Vol. , pp. 1-26, 2009. Available at SSRN: https://ssrn.com/abstract=1486512

Laura Valderrama (Contact Author)

International Monetary Fund - Monetary and Capital Markets Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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