Working Paper: NBER ID: w2204
Authors: Jonathan Eaton; Mark Gersovitz
Abstract: Foreign portfolio investment is threatened by the risk of default and repudiation, while direct foreign investment is threatened by the risk of expropriation. These two contractual forms of investment can differ substantially in: (1) the amount of capital they can transfer from abroad to capital-importing countries; (2) the shadow cost of capital and (3) their implications for the tax policy of the host. The interaction of public borrowing from abroad with investments abroad by private citizens of the borrowing country can imply multiple equilibria with very different welfare consequences. One equilibrium involves private inflows and repayment of public debt. Another is characterized by capital flight and default.
Keywords: country risk; capital transfer; foreign investment; public debt; expropriation
JEL Codes: F34; G15; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| risk of default and expropriation (H13) | amount of capital transferred through different investment mechanisms (F21) |
| higher risks (I12) | lower capital inflows (F32) |
| public debt obligations (H63) | disincentives for private investment (H54) |
| interaction between public debt and private investment (H63) | multiple equilibria (D50) |
| decentralized borrowing decisions (H74) | underborrowing or overborrowing relative to the social optimum (H74) |