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8 - Transparency and Investment

from PART III - WHY DISCLOSE

Published online by Cambridge University Press:  17 September 2018

James R. Hollyer
Affiliation:
University of Minnesota
B. Peter Rosendorff
Affiliation:
New York University
James Raymond Vreeland
Affiliation:
Princeton University, New Jersey
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Summary

Investment requires a guess about the future. The investor sacrifices consumption today to create wealth tomorrow. Information about what the futuremight hold is necessary to make a rational decision about the trade-off between present and future consumption. Transparency informs this decision. Indeed, throughout this book, we underscore the importance of our notion of transparency – the public disclosure of aggregated information pertaining to citizen welfare – by advancing a simple premise: such disclosure matters for economic decision-makers.

We recognize that data dissemination impacts a state's economic development. Business people – charged with choosing to expand or contract production, hiring or firing employees, and deciding how to allocate portfolios – perform their tasks with a close eye on the performance of the broader economy. They rely on the government to provide data. Public goods problems inhibit the private production of aggregate economic data, so when the government fails to make such information available, it leaves economic decision-makers blind.

A reader might rightly wonder why, out of all potential economic aggregates, we choose to beginwith investment. Our theoretical models focus on the overall performance of the economy, so one might consider looking at the effect of data dissemination on economic growth. As Roodman (2007a) explains, however, growth fluctuates for idiosyncratic reasons and may not represent a good starting point (see also Dreher et al. 2013).We thus take a straightforward approach and break down economic growth into its components: technological change, capital stock growth, and labor force growth. It may not be obvious how data dissemination would directly affect labor force growth, but transparency does matter for technological change and, perhaps most importantly, for growth in capital.

Investment, both foreign and domestic, is critical to economic performance. The rate of investment, in the short term, dictates the growth rate of the economy and, in the long term, the equilibrium level of production (Solow 1957). Certain investment from abroad (foreign direct investment) may additionally involve transfers of technology and skills between countries, with positive spillovers that increase the rate of growth for the economy as a whole (Grossman and Helpman 2001; Jensen 2006).

Type
Chapter
Information
Information, Democracy, and Autocracy
Economic Transparency and Political (In)Stability
, pp. 217 - 246
Publisher: Cambridge University Press
Print publication year: 2018

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