Expropriation risk,investment decisions and economic sectors |
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Affiliation: | 1. Universidad Carlos III de Madrid, Cl. Madrid 126, 28045 Getafe, Spain;2. Bank of Spain, Cl. Alcala 48, 28014 Madrid, Spain;1. Brunel University, London, United Kingdom;2. University of Navarra, Pamplona, Spain;1. Universität Erfurt, Faculty of Economics, Law and Social Sciences, Chair for International Economics, Nordhäuser Straße, 99089 Erfurt, Germany;2. Deutscher Bundestag, Platz der Republik, Büro Margaret Horb, MdB, 11011 Berlin, Germany |
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Abstract: | We build a Real Options model to assess the importance of private provision and the impact of expropriation risk on investment timing, business values, governmental costs and social welfare. We consider two types of businesses (essential and non-essential) and two stages (operating businesses and investment opportunities) and answer questions regarding three main topics: the firm's reaction to expropriation risk, the government drivers to expropriate, and the welfare costs of expropriation. Our results show that responding to expropriation risk the private investor is driven to suboptimal investment decisions. When we endogenize the reputational costs of expropriation, our results show that the decision of the government to expropriate largely depends on the type of business being targeted. In terms of welfare, our results show that expropriation is always associated with a loss. |
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