An Economic Theory of Political Institutions: Foreign Intervention and Overseas Investments

46 Pages Posted: 12 Apr 2007 Last revised: 20 Jan 2008

See all articles by Toke Skovsgaard Aidt

Toke Skovsgaard Aidt

University of Cambridge - Faculty of Economics and Politics

Facundo Albornoz

University of Birmingham

Date Written: January 15, 2008

Abstract

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

Aidt, Toke Skovsgaard and Albornoz, Facundo, An Economic Theory of Political Institutions: Foreign Intervention and Overseas Investments (January 15, 2008). Available at SSRN: https://ssrn.com/abstract=978978 or http://dx.doi.org/10.2139/ssrn.978978

Toke Skovsgaard Aidt

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
+44 1223 33 5231 (Phone)
+44 1223 33 5475 (Fax)

Facundo Albornoz (Contact Author)

University of Birmingham ( email )

Economics Department
Birmingham, B15 2TT
United Kingdom

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