Policy Risk, Uncertainty, and Investment: Evidence from the English East India Company

Abstract

Governments can have large effects on investment by raising policy risks and uncertainty. This paper estimates their effects by studying the famous English East India Company. It had diffcult relations with some English governments and positive relations with others. This translated into either hostile or friendly policies. New time-series data on the Company's shipping and port capacity are used to analyze the effects of English governments and government changes on investment. Econometric results show that investment rates were lower in years with a new monarch and when elections changed the majority party in the House of Commons. Investment also differed depending on which monarch or majority party governed. This paper shows the relevance of policy risk and uncertainty over a long time-span, especially for companies involved in prominent public partnerships. It also illustrates the value of studying evolving policy risks in historical settings.