Expropriation Risk, Investment Decisions and Economic Sectors

32 Pages Posted: 28 Aug 2014

See all articles by Diana Constanza Restrepo Ochoa

Diana Constanza Restrepo Ochoa

Escuela de Economía y Finanzas - Universidad Eafit; Universidad Carlos III de Madrid - Department of Business Administration

Ricardo V.A.P. Correia

University of Manchester - Division of Accounting and Finance; Universidad Carlos III de Madrid

Juan Ignacio Peña

Universidad Carlos III de Madrid - Department of Business Administration

Francisco Javier Población García

European Central Bank (ECB)

Date Written: August 15, 2014

Abstract

We build a Real Options model to assess the importance of private provision and the impact of expropriation risk on investment timing, investment volumes, governmental costs and social welfare. We consider two types of businesses (essential and non essential businesses) and two stages (operating and investment opportunities), and answer questions regarding three main topics: the firm's reaction to expropriation risk, the government drivers to expropriate, and the costs this generates in terms of welfare. We find that the firm makes suboptimal investment decisions. When we endogenize the reputational costs of expropriation, results show that the decision of the government regarding the level of political risk will largely depend on the type of business. However, in terms of welfare it is never optimal to expropriate.

Keywords: Expropriation risk, Expropriation Option, Investment option, Abandonment option, Costs of expropriation

JEL Classification: H80, G38

Suggested Citation

Restrepo Ochoa, Diana Constanza and Correia, Ricardo V.A.P. and Peña, Juan Ignacio and Población García, Francisco Javier, Expropriation Risk, Investment Decisions and Economic Sectors (August 15, 2014). Available at SSRN: https://ssrn.com/abstract=2487774 or http://dx.doi.org/10.2139/ssrn.2487774

Diana Constanza Restrepo Ochoa (Contact Author)

Escuela de Economía y Finanzas - Universidad Eafit ( email )

Carrera 49 N° 7 sur – 50
Medellín, Antioquia 00000
Colombia

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

Ricardo V.A.P. Correia

University of Manchester - Division of Accounting and Finance ( email )

Crawford House
Oxford Road
Manchester M13 9PL
United Kingdom

Universidad Carlos III de Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

Juan Ignacio Peña

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain
34 91 624 9625 (Phone)
34 91 624 9608 (Fax)

Francisco Javier Población García

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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