Does the flexibility of institutions affect investment behavior?

Not necessarily, and it depends on how flexibility is defined. If “flexibility” is interpreted as “informal” (as opposed to “inflexible”, formal institutions), the Credibility Thesis predicts that one might encounter situations in which flexible institutions could lead to less investments, inasmuch as we would find situations in which they lead to more investments, or we find no influence at all. Similar confusion would result from studies into the relation between inflexible institutions and investment behavior. For the same reason, regression analyses aiming to correlate form to performance yield contradictory results (regardless whether we replace “flexibility” with “democracy” or “private property”, and “investments” with “GDP” or “price”).

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In effect: “Tenure security and formal title might rally social support in some cases; yet exactly the same thing could be said for insecure and informal property rights.” It is the reason why it is posited “that what ultimately determines the performance of institutions is not their form in terms of formality, privatization, or security, but their spatially and temporally defined function.” See P. Ho, “The ‘Credibility Thesis’ and its Application to Property Rights: (In)secure Land Tenure and Social Welfare in China“, Land Use Policy, 2014, 40, Sept, pp. 13-14.

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