Country Risk and the Organization of International Capital Transfer

38 Pages Posted: 29 Dec 2000 Last revised: 12 Jul 2010

See all articles by Jonathan Eaton

Jonathan Eaton

Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

Mark Gersovitz

Johns Hopkins University - Zanvyl Krieger School of Arts and Sciences; National Bureau of Economic Research (NBER)

Date Written: April 1987

Abstract

Foreign portfolio investment is threatened by the risk of default and repudiation, while direct foreign investment is threatened by the risk of expropriation. These two contractual forms of investment can differ substantially in: (1) the amount of capital they can transfer from abroad to capital-importing countries; (2) the shadow cost of capital and (3) their implications for the tax policy of the host. The interaction of public borrowing from abroad with investments abroad by private citizens of the borrowing country can imply multiple equilibria with very different welfare consequences. One equilibrium involves private inflows and repayment of public debt. Another is characterized by capital flight and default.

Suggested Citation

Eaton, Jonathan and Gersovitz, Mark, Country Risk and the Organization of International Capital Transfer (April 1987). NBER Working Paper No. w2204. Available at SSRN: https://ssrn.com/abstract=241427

Jonathan Eaton (Contact Author)

Leonard N. Stern School of Business - Department of Economics ( email )

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HOME PAGE: http://www.econ.nyu.edu/user/eatonj/

National Bureau of Economic Research (NBER)

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Mark Gersovitz

Johns Hopkins University - Zanvyl Krieger School of Arts and Sciences ( email )

Department of Economics
Baltimore, MD 21218
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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