INVESTMENT, PROPERTY-RIGHTS AND POLITICAL INSTABILITY - THEORY AND EVIDENCE

This paper addresses the question why investment rates differ so marke dly across countries. In the paper a model is laid out explaining why governments in unstable and polarized societies may not have sufficien t incentives to undertake legal reform so as to fully protect property rights, and how this may hold back private investment. The model yiel ds testable predictions regarding the link from political instability to the quality of property rights, as well as the link from property r ights to investment. These predictions hold up when confronted with cr oss-country data for around 100 countries. In particular once I contro l for the quality of property rights, the different measures of politi cal instability and polarization employed have no direct effect on pri vate investment. Thus, a possible link between political instability a nd investment is identified. Extensive sensitivity analyses show that the empirical results are robust to an ample of prospective statistica l problems. (C) 1998 Elsevier Science B.V. All rights reserved.