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Regulatory Uncertainty and Investment: Evidence from Antitrust Enforcement
By George Bittlingmayer
Introduction
Business investment is volatile and hard to explain. Factors that should affect investment as a matter of theory have little influence in practice, and even ad hoc empirical studies have had at best fair to middling success.
The investment literature follows a well-trodden path. High on the list of possible factors that should drive investment activity are easily measured variables related to the cost of investment or the demand for goods. In theory, interest rates should matter, as should the price of capital goods. Tax policy affecting investment should also matter. The logic in all three cases—interest rates, the price of capital goods, and tax policy—is compelling. The lower the cost of new investment and the higher the expected returns, the more business will invest. Similarly, actual consumer demand and company profits should matter. It seems plausible that a company or industry with strong demand or a company awash in cash flow would invest more. Another plausible line of inquiry holds that investors' demand for assets should matter. It focuses on the stock market value of corporations divided by their book value (Tobin's q), on the theory that stock valuations in excess of replacement cost will induce new investment. In practice, however, all of these approaches leave a good deal of the fluctuation in business investment unexplained.
What's missing? Arguably, politics is missing. In particular, political uncertainty poses substantial risks to investment. That uncertainty can take various forms. In extreme cases, a shift in the political climate will threaten property rights, the enforceability of contracts, the repatriation of profits, and the integrity of the monetary standard. These are of course not mere theoretical possibilities. Revolution, expropriation, inflation, and exchange controls do take place. It bears emphasis that a catastrophe does not have to take place. Even a substantial but unrealized probability of a major change will cause business to wait and see. Fears and not just actual events matter.
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