A Violent Future? Political Risk Insurance Markets and Violence Forecasts

There is a substantial literature that has linked past acts of violence to investment. In this article, we argue that the appropriate mechanism linking violence to investment is investor perceptions of risk, in which forward-looking investors attempt to predict the likelihood of future political violence. We take advantage of a new data source—the price paid by investors to purchase risk insurance coverage—to more accurately capture how risk is assessed in investment decision making. Building on the civil war literature, we offer a broad explanatory model of variation in violence risk in the developing world. After controlling for recent past experiences with violence, we find that wealth and democracy significantly affect the perception of risk, whereas demographic factors and natural resource endowments have limited, if any, influence.