Political Risk, Reputation, and the Resource Curse
37 Pages Posted: 29 Aug 2010
Date Written: August 28, 2010
There is a growing literature on how natural resources affect both economic performance and political regimes. In this paper we add to this literature by focusing on how natural resource wealth affects the incentives of governments to uphold contracts with foreign investors across all sectors. We argue that while all states suffer reputation costs from reneging on contracts, governments in natural re-source dependent economies are less sensitive to these costs, leading to a greater probability of expropriation and contract disputes. Specifically, leaders weigh the benefits of reneging on contracts with investors against the reputation costs of openly violating agreements with firms. Our theoretical model predicts a positive association between resource wealth and expropriation. Using a dataset from the political risk insurance industry we show that resource dependent economies have much higher levels of political risk.
Keywords: Resource Curse, Political Risk, Foreign Direct Investment, Reputation
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