Credibility, Irreversibility of Investment, and Liberalization Reforms in LDCs: A Note

Empirical evidence of the impact of policy uncertainty on aggregate investment is mixed. However, if the relationship between policy uncertainty and investment performance is non-linear, linear regression exercises might not capture the effect of policy uncertainty. In this short paper, I present a simple model with investment irreversibility which shows that, in the presence of legal constraints on investment in foreign assets, domestic real investment performance is poorer when trade reforms are only partially incredible.