Underinvestment and Expropriation

Abstract

This paper argues that there are several factors that investors must take into account when choosing to invest or not. One of the most important factors, which goes largely undiscussed in existing literature, is the behavior of governments undergoing political reform. Specifically, the temptation to renege on prior agreements becomes stronger over time. This causes investors to make fewer investments, thus giving markets an appearance of underinvestment. The degree of underinvestment, however, can be used as an indicator for how likely investors believe government expropriation is in particular industries.