2-SIDED EXPROPRIATION AND INTERNATIONAL EQUITY CONTRACTS

The paper considers a model in which investors in two symmetrical countries can trade equity claims on their endowments. The governments of the two countries expropriate the foreign-owned securities if doing so raises domestic welfare. In spite of the possibility of expropriation, agents may still choose to hold completely pooled portfolios. Depending on preferences in the two countries, increases in the level of domestic output can increase or decrease the probability of expropriation. In the equilibria we consider, agents hold too much foreign equity: a reduction in foreign investment raises welfare by reducing the probability of expropriation.