Thursday 5 January 2017

Managing political risk

At the, oddly named, Pro-Market blog Roy Shapira posts about a recent working paper that suggests that firms react to political risk, both passively by cutting investment and employment, and actively by ramping up lobbying efforts.

Shapira writes,
In a recent working paper titled Aggregate and Idiosyncratic Political Risk: Measurement and Effects, Chicago Booth professor Tarek Hassan and co-authors Stephan Hollander, Laurence van Lent, and Ahmed Tahoun employ an innovative methodology to try to narrow the gap in our ability to measure political risks and how firms react to them. Their findings suggest that firms do indeed react to political risk, both passively by cutting investment and employment, and actively by ramping up lobbying efforts. (Emphasis added)
But isn't this exactly what we would expect? Isn't this the outcome that regime uncertainty would tell us we should expect? The whole point of regime uncertainty is that if investors can not be sure as to how future government actions will effect their property rights and their returns to investment they will be hesitant to make long-term commitments. In other words firms cut back on investment and employment. Decisions about such variables are highly sensitive to risk in various forms, including uncertainty over future tax and regulatory policy. One obvious way to deal with such uncertainty is to lobby the government. If you have input into the policy making process you can gain knowledge of any future polices, thereby reducing uncertainty, and also try to influence the policy agenda in ways that are beneficial to your particular industry.

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