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Measuring Risk: Political Risk Insurance Premiums and Domestic Political Institutions

by Nathan Jensen. Reading for week of November 15, 2005.

There is a resurgence in the literature in political science on how political risk affects multinational corporations operating in emerging markets.  Most existing studies suffer from data problems where researchers can only offer indirect evidence of the relationship between political institutions and political risk.  In this paper I utilize a new data resource to explore how domestic institutions affect political risks for multinationals.  Utilizing price data from political risk insurance agencies I test how domestic political institutions affect the premiums multinationals pay for coverage against 1) expropriations and contract disputes and 2) government restrictions on capital transactions.  I find that constraints on politicians lead to marginally lower expropriation and transfer risks.  Democracy, on the other hand, greatly reduces expropriation risk but has no impact on transfer risk.

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