Working Paper: CEPR ID: DP10373
Authors: Timothy Besley; Hannes Mueller
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 Codes: F21; F23; O43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strong executive constraints (D20) | foreign investment flows (F21) |
| strong executive constraints (D20) | reduction in volatility of productivity growth (O49) |
| reduction in volatility of productivity growth (O49) | foreign investment flows (F21) |
| strong executive constraints (D20) | lower investment risk (G11) |
| strong executive constraints (D20) | ambiguous effect on mean growth (O41) |
| strong executive constraints (D20) | discrete increase in investment inflows after institutional change (F21) |