An Economic Theory of Political Institutions: Foreign Intervention and Overseas Investments
46 Pages Posted: 12 Apr 2007 Last revised: 20 Jan 2008
Date Written: January 15, 2008
We present a theory of endogenous political regimes that emphasizes overseas investments and that foreign governments may either induce regime transitions or promote regime consolidations. In our theory, foreign intervention is driven by the interaction between strategic foreign investments and the economic and political characteristics of the economy. Foreign intervention can be pro-democracy, pro-autocracy or take the form of a foreign-sponsored coup. We characterize different forms of foreign intervention and identify the conditions under which they occur. We highlight new channels through which economic factors cause regime transitions. For example, foreign-sponsored coups are more likely to occur in poor economies, in the presence of capital flights and in relatively equalitarian economies. We relate the analysis to evidence on foreign intervention from around the world.
Keywords: Political transitions, democracy, autocracy, foreign investments, foreign government intervention
JEL Classification: D72, D74, H71, 015, P16
Suggested Citation: Suggested Citation