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Crisis and contract breach: The domestic and international determinants of expropriation

  • Nathan M. JensenEmail author
  • Noel P. Johnston
  • Chia-yi Lee
  • Hadi Sahin
Article
  • 6 Downloads

Abstract

In this paper we address how external factors shape government decisions to break or uphold contracts, specifically focusing on how economic shocks and support from multilateral financial institutions shape leader decisions to expropriate from investors. Contrary to conventional wisdom and much of the existing scholarship, we argue that governments are less likely to expropriate from investors during periods of economic crisis since governments become more sensitive to the reputational costs of expropriating. We also argue that governments are sensitive to the levers other governments may use to punish for expropriation, such as withholding IMF and World Bank funding. We test these theories using a dataset of investment expropriations and case studies of thirty-four investment disputes that were resolved pre-claim. Our econometric analysis suggests that expropriations of foreign investment are less common during periods of crisis, and that countries under IMF agreements or borrowing from the World Bank are less likely to expropriate. Our thirty-four case studies, which substantiate the role of government reputation and multilateral pressure, support our statistical results.

Keywords

Expropriations Economic crisis Multilateral financial institutions Reputational costs Retaliation costs 

JEL Classification

F53 F69 H13 

Notes

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Authors and Affiliations

  1. 1.University of Texas at AustinAustinUSA
  2. 2.University of California at RiversideRiversideUSA
  3. 3.Nanyang Technological UniversitySingaporeSingapore
  4. 4.BursaTurkey

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