Et Tu, Brute? Reputations, FDI, and Contract Breach

• In Event: Complexities of International Cooperation and Law

Abstract

A central problem facing foreign investors is whether host-governments will violate their contracts once investments are made. According to conventional wisdom, states can overcome this commitment problem by cultivating reputations in the eyes of potential investors. Yet, the field has a static perspective on reputations: we do not know how states’ current reputations shape their incentives to breach contract. Through a dynamic model of FDI and contract breach behavior, I show that better reputations for treating foreign investors generate stronger incentives to breach contract. I use a design-based approach to test this prediction. leveraging the as-if random occurrence of natural disasters. I show that states with good reputations for treating foreign investors are more likely to breach contract following disasters. For the broader cooperation literature in IR, this suggests
that the reputation mechanism is a double-edged sword. Reputational incentives boost cooperation by enabling states to convince their audience to trust them, but they also generate opportunities to take advantage of this trust.

Author

• Ekrem T. Baser, New York University Abu Dhabi