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Intertemporal Incentives, Equilibrium Selection, and Rational Investment Collapse

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  • Maciej K Dudek

    (Vistula University and INE PAN, Warsaw, Poland.)

Abstract

In this paper, we model the process of international investment flows when agents face strategic motives. We show in a fully rational framework that foreign investment crises can occur when the availability of foreign funds is higher than normal. Specifically, we illustrate, in a framework with multiple Pareto-rankable equilibria, that a transition to an inferior equilibrium culminating in a foreign investment crisis can occur when the availability of foreign capital is higher than normal and is expected to be only temporary. We show that a temporary and higher than normal level of availability of foreign funds alters intertemporal incentives and makes the sustainability of a Pareto-superior outcome less likely and thus allows for the occurrence of foreign investment crises.

Suggested Citation

  • Maciej K Dudek, 2016. "Intertemporal Incentives, Equilibrium Selection, and Rational Investment Collapse," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 42(3), pages 428-440, June.
    • Handle: RePEc:pal:easeco:v:42:y:2016:i:3:p:428-440
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