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Political Risk and Irreversible Investment

Sumru Altug (), Fanny S. Demers and Michel Demers ()

Koç University-TUSIAD Economic Research Forum Working Papers from Koc University-TUSIAD Economic Research Forum

Abstract: The objective of this paper is twofold. First, we develop a theoretical model to investigate the impact of political risk on irreversible investment. Second, we apply our model to an analysis of the effects of risk of separation of the province of Quebec from the Canadian federation. We model the probability of a regime switch using the properties of the electoral process and examine the response of investment to changes in the risk of separation. We consider the impact of investors’ perception of the risk of separation and financial market volatility separately. We show that political risk has a depressing impact on investment even if the "bad" regime has never been observed in the sample.

Keywords: Irreversible investment; political risk; regime shifts; Quebec investment; Canada (search for similar items in EconPapers)
JEL-codes: E22 D92 O16 O11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-pol
Date: 2007-05
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Persistent link: http://EconPapers.repec.org/RePEc:koc:wpaper:0707

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