Institutions, Volatility and Investment

58 Pages Posted: 2 Feb 2015

See all articles by Timothy J. Besley

Timothy J. Besley

London School of Economics & Political Science (LSE) - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Hannes Felix Mueller

Instituto de Análisis Económic (IAE) Barcelona

Date Written: January 2015

Abstract

Countries with strong executive constraints have lower growth volatility but similar average growth to those with weak constraints. This paper argues that this may explain a strong reduced-form correlation between executive constraints and inflows of foreign investment. It uses a novel dataset of Dutch sector-level investments between 1983 and 2010 to explore this issue. It formulates an economic model of investment and uses data on the mean and variance of productivity growth to explain the relationship between investment inflows and executive constraints. The model can account for the aggregate change in inflows when strong executive constraints are adopted in terms of the reduction in the volatility in productivity growth. The data and model together suggest a natural way of thinking about country-specific heterogeneity in investment inflows following the adoption of strong executive constraints.

Keywords: democracy, executive constraints, foreign investment, political risk, volatility

JEL Classification: F21, F23, O43

Suggested Citation

Besley, Timothy J. and Mueller, Hannes Felix, Institutions, Volatility and Investment (January 2015). CEPR Discussion Paper No. DP10373, Available at SSRN: https://ssrn.com/abstract=2559314

Timothy J. Besley (Contact Author)

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
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National Bureau of Economic Research (NBER)

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United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Hannes Felix Mueller

Instituto de Análisis Económic (IAE) Barcelona ( email )

Barcelona, Bellaterra 08193
Spain

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