Essays on information regimes and uncertainty in emerging economies

This thesis contains three papers studying the behavioural response of firms, households and investors in emerging economies to changes in expectations and uncertainty. The first paper investigates how economic agents change their consumption and investment behaviour to news about unanticipated changes to power sector plans by exploiting a novel dataset for the identification of news shocks in a vector– autoregression. While there is an immediate expectations–driven GDP response to a surprise capacity addition in OECD economies, this positive output effect is absent in developing and emerging countries. Firms and households in developing countries respond to failed power projects by immediately reducing investments and are also subjected to lower economic growth as a result relative to the pre–disappointment period. The second paper examines regulatory uncertainty as a barrier affecting infrastructure service investments and quality in Brazil. Exploiting a quasi–natural experiment for identification, it finds that electric utilities partially shielded from uncertainty significantly increase their irreversible investments in electricity distribution infrastructure. This response is qualitatively consistent with optimal behaviour as prescribed by real options theory. The third paper uses an autoregressive distributed lag model and finds that sovereign and corporate bond yields in emerging economies exhibit a long–run relationship that is not explained by economic conditions, firm fundamentals, bond properties, or external factors affecting emerging countries. The paper identifies perceived transfer risks by investors as the key channel. Investors’ perceived transfer risks lead corporate and sovereign bond yields to co–move and generally converge. The introduction and conclusion of the thesis further explain common themes