Foreign Investment and Expropriation Under Oligarchy and Democracy

23 Pages Posted: 7 Feb 2012  

Facundo Albornoz

University of Birmingham

Sebastian Galiani

University of Maryland - Department of Economics

Daniel Heymann

Universidad de Buenos Aires

Multiple version iconThere are 2 versions of this paper

Date Written: March 2012

Abstract

We study the incentives to expropriate foreign capital under democracy and oligarchy. We model a two‐sector small open economy where foreign investment triggers Stolper–Samuelson effects through reducing exporting costs. The incentives to expropriate depend on the distributional effects associated to the investment. How investment affects the incomes of the different groups in society depends on the sectors where these investments are undertaken and on structural features of the economy such as factor intensity, factor substitutability, and price and output elasticities. We characterize the equilibria of the expropriation game and show that if investment is undertaken in the sector that uses labor less intensively then democratic expropriations are more likely to take place. We test this prediction and provide strong evidence of its validity.

Suggested Citation

Albornoz, Facundo and Galiani, Sebastian and Heymann, Daniel, Foreign Investment and Expropriation Under Oligarchy and Democracy (March 2012). Available at SSRN: https://ssrn.com/abstract=2000481 or http://dx.doi.org/10.1111/j.1468-0343.2011.00391.x

Facundo Albornoz

University of Birmingham ( email )

Economics Department
Birmingham, B15 2TT
United Kingdom

Sebastian Galiani (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

Daniel Heymann

Universidad de Buenos Aires ( email )

Buenos Aires
Argentina

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