Bureaucratic Discretion, Business Investment, and Uncertainty

What determines whether policy environments attract or deter investment? Scholars worried about the vulnerability of market-supporting institutions to political manipulation have identified delegation to independent actors as way to increase policy environments’ predictability. Extant arguments, however, risk overgeneralizing from the experience of developed democracies. I argue that investors’ response to bureaucratic discretion—agents’ leeway to make decisions and act independently of political bodies—depends upon the broader institutional context. Where robust political institutions are lacking, bureaucratic discretion acts as a source of unpredictability that deters investors; conversely, political institutions that share the cost of monitoring help to mitigate uncertainty about how bureaucrats will use discretion in applying regulatory rules. Using survey data from over 600 enterprises in Russia, I find that perceptions of bureaucratic discretion are negatively associated with firm managers’ willingness to invest; this effect is particularly pronounced in regions where the institutional environment discourages political competition.