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Investment under risks and uncertainty in Afghanistan

Author

Listed:
  • Farazi,Subika
  • Rostom,Ahmed Mohamed Tawfick
  • Sinha,Rishabh

Abstract

This paper investigates the state of low investment in Afghanistan by studying how investment decisions interact with risks and uncertainty in the presence of underdeveloped financial markets. The analysis shows that investing firms experience a higher probability of being affected by events related to crime and corruption and spend more on security arrangements. Firms that participate in the formal financial sector are also subject to higher levels of risk and uncertainty. As more productive firms face higher risks and uncertainty, a model of resource allocation with heterogeneous firms is used to quantify the economic loss from crime and corruption. The estimated aggregate output loss of 12 percent is significantly higher than the 7 percent loss observed in the absence of the resource allocation channel.

Suggested Citation

  • Farazi,Subika & Rostom,Ahmed Mohamed Tawfick & Sinha,Rishabh, 2018. "Investment under risks and uncertainty in Afghanistan," Policy Research Working Paper Series 8443, The World Bank.
    • Handle: RePEc:wbk:wbrwps:8443
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