Political Institutions and Property Rights: Veto Players and Foreign Exchange Commitments in 127 Countries

Abstract

What political institutions improve property rights? Building on the work of North and Weingast (1989), this paper argues that institutional checks on policymaking discretion (veto players) improve the property rights of investors regarding the value of the domestic currency. Veto players constrain the ability of policymakers to opportunistically pursue policy that may lead to a depreciated domestic currency. The study offers some of the first large-sample evidence that checks and balances institutions lower the risk of expropriation, using a direct measure of investors' revealed preferences as the dependent variable. In particular, evidence from 127 countries over the period 1975-2004 shows that the use of foreign currency as a store of value -- a common hedge against domestic currency depreciation -- decreases with the number of veto players in government. The findings are robust to multiple specifications, including instrumental variables models that exploit exogenous sources of institutional variation.