Democracy, Veto Player, and Institutionalization of Sovereign Wealth Funds

Sovereign Wealth Funds (SWFs) have become important and controversial in global economy. We analyze why some SWFs have more encompassing and clearly specified governance rules than others. We argue that SWF institutionalization is structurally rooted in a country’s regime type and number of veto players in public policymaking. Democracy promotes SWF institutionalization by its need for strong rule of law, voters trying to constrain opportunistic behaviors of politicians, and the free flow of information. In contrast, the number of veto players has a curvilinear effect. When the number of veto players is very small, institutionalization is too rigid, constraining, and not preferred; when the number of veto players is moderate, it is optimal for veto players to manage their conflict over SWF governance in a more routine and institutionalized fashion; and when the number of veto players grows above a threshold, it becomes too costly to coordinate and produce mutually agreeable institutional rules. Our empirical analysis of 46 SWFs in 30 countries from 2007 to 2009 provides robust confirming evidence. SWF governance is more institutionalized and transparent in democracies and in countries with four veto players. Our research has important theoretical and policy implications for the ongoing debate over SWF.