Expropriation risk, investment decisions and economic sectors ¬リニ

a r t i c l e i n f o 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 ex-propriation, 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. The wave of nationalizations in Africa and Latin America during the last decade brought back the fear of expropriation to the business environment. An expropriation can be defined as government seizure of the ownership or control rights of a firm. The problem it poses to investors is that compensation for expropriation in most cases is either nonexis-tent or below the fair value of the firm. For a wealth maximizing government it is appealing to seize the benefits of a target firm that has already realized an irreversible investment, offering in turn an indemnity well below market value. We use Real Options and build a version of a classical sequential investment timing model in the spirit of McDonald and Siegel (1986) to investigate the decisions of a firm and of a government in the presence of expropriation risk. The firm decides when to undertake a new investment project and when to abandon it if it is no longer profitable. The government decides when to expropriate the firm once it is in operation. With this model, we answer three main questions about the governments' drivers for expropriations, the firms' reactions to this phenomenon and the welfare costs that are generated in the process. The first question considers the drivers of governments to expropriate a business. Existing literature approaches this question from different perspectives. For instance, governments can be considered social welfare or national income maximizers or even as punishing multinational firms that renege on contracts (Guriev et al., 2011). An additional strand of the literature assumes an opportunistic government trying to …