Expropriation risk, investment decisions and economic sectors

Diana Restrepo Ochoa, Ricardo Correia, Juan Ignacio Peña and Javier Población

Economic Modelling, 2015, vol. 48, issue C, 326-342

Abstract: 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 expropriation, 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.

Keywords: Expropriation risk; Real Options; Investment option; Abandonment option; Cost of expropriation (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (4)

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Working Paper: Expropriation risk, investment decisions and economic sectors (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:48:y:2015:i:c:p:326-342

DOI: 10.1016/j.econmod.2014.11.005

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