When a transnational corporation invests abroad, it runs the risk that its investment will be expropriated. Any agreements or contracts undertaken by the transnational company and the host country must be designed to be self-enforcing. This paper extends previous work on investment when contracts are incomplete to a dynamic context. It is shown that investment is initially underprovided but increases over time and for certain parameter values tends to the efficient level. The expected future discounted returns to the transnational company decline over time, extending R. Vernon's (1971) observation of the obsolescing bargain.
|Number of pages||28|
|Journal||Review of Economic Studies|
|Publication status||Published - Jan 1994|