Investing without credible inter-period regulations : a bargaining approach with application to investments in natural resources

Abstract

A government’s lack of credibility when promising future taxation and regulation of foreign direct investment is often regarded as an obstacle to foreign investment. As shown in this paper, the total lack of inter-period credibility may not necessarily prevent investments from taking place. Both the government and the investor can benefit from negotiating a series of short-lived agreements where the investor gets a share of the revenue generated from previous investments against the undertaking of making new investments. This assumes that intra-period agreements are respected by the parties.