Political Institutions and Electric Utility Investment: A Cross-Nation Analysis

Abstract

The likelihood that a government will meet its promises varies with the structure of a nation9s political institutions. Where multiple independent actors wield veto power over potential policy changes, macroeconomic, tax, and regulatory stability will be enhanced—thus reducing the variance on an investment project9s expected return. This relationship is shown to hold for an industry with extremely high sunk costs and politicization, namely, electric utilities. Managers considering investment in infrastructure projects should therefore evaluate the investment proposal not only on its explicit terms, but also on the likelihood that the government will honor them.