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Expropriation risk, investment decisions and economic sectors

Author

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  • Restrepo Ochoa, Diana C.
  • Correia, Ricardo
  • Peña, Juan Ignacio
  • Población, Javier

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.

Suggested Citation

  • Restrepo Ochoa, Diana C. & Correia, Ricardo & Peña, Juan Ignacio & Población, Javier, 2015. "Expropriation risk, investment decisions and economic sectors," Economic Modelling, Elsevier, vol. 48(C), pages 326-342.
    • Handle: RePEc:eee:ecmode:v:48:y:2015:i:c:p:326-342
    DOI: 10.1016/j.econmod.2014.11.005
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    Cited by:

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    More about this item

    Keywords

    Expropriation risk; Real Options; Investment option; Abandonment option; Cost of expropriation;
    All these keywords.

    JEL classification:

    • H80 - Public Economics - - Miscellaneous Issues - - - General
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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