Investment and Institutional Uncertainty: A Comparative Study of Different Uncertainty Measures

Abstract

Ample empirical evidence shows evidence shows a negative relationship between aspects of institutional uncertainty and investment. Most studies, however, do not allow a comparison between different dimensions of such uncertainty because they focus on specific indicators, particular regions, or different periods. To gain comparable results, this paper tests the most frequently used uncertainty measures in investment regressions using the same specifications, country sample, and time period. A number of indicators proved significant and robust to changes in specification. The paper concludes with evaluation of the quantitative effects of the significant uncertainty indicators on investment. We find that a lack of rule of law, high corruption and volatility in real exchange rate distortions are the most detrimental for investment.

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JEL Classification: E22