External influences on economic reform: Reform as a regional public good

Abstract: We study a game between a group of rich country investors and a group of developing countries. Countries adopt policy reform to raise the return to and try to attract foreign investment. We focus on the interaction between investors’ incentives to acquire country-specific information on the incidence of reform and countries’ incentives to undertake reform. Uninformed investors may still invest in the region based on a costless signal of the regional average return. In this case, reform is a regional public good. We show that equilibria exist with no investment and no reform, with partial reform and blanket investment by uninformed investors, and with partial reform and targeted investment by informed investors. However, it is almost impossible to sustain complete reform as an equilibrium. [Copyright &y& Elsevier]