Political Risk and Irreversible Investment

The objective of this article is two-fold. First, we develop a theoretical model to investigate the impact of political risk on irreversible investment. Second, we apply our model to an analysis of the effects of risk of separation of the province of Quebec from the Canadian federation. We model the...

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Bibliographic Details
Published inCESifo economic studies Vol. 53; no. 3; pp. 430 - 465
Main Authors Altug, Sumru G., Demers, Fanny S, Demers, Michel
Format Journal Article
LanguageEnglish
Published Oxford Oxford University Press 01.09.2007
SeriesCESifo Economic Studies
Subjects
Canada
Capital market
Investment
Investments
Investors
Perception
Perceptions
Political conditions
Political risk
Quebec
Regime transition
Risk
Secession
Securities markets
Separatism
Statistical analysis
Studies
Volatility
Canada
Quebec Canada
Canada
Quebec investment
Irreversible investment
political risk
regime shifts
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Summary:The objective of this article is two-fold. First, we develop a theoretical model to investigate the impact of political risk on irreversible investment. Second, we apply our model to an analysis of the effects of risk of separation of the province of Quebec from the Canadian federation. We model the probability of a regime switch using the properties of the electoral process and examine the response of investment to changes in the risk of separation. We consider the impact of investors' perception of the risk of separation and financial market volatility separately. We show that political risk has a depressing impact on investment even if the "bad" regime has never been observed in the sample. (JEL Codes: E22, D92, O16, O11)
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:1610-241X
1612-7501
DOI:10.1093/cesifo/ifm014