Capital controls and conflict of interests

This paper is a normative analysis of the legal restrictions on international financial movements based on a formal model which analyzes the empirical observation that the degree of financial protectionism is associated with changes in the distribution of welfare among agents. The strategic interactions among four types of agents (a trade union, a firm manager, a financial investor and a government) are analyzed, and the optimal amount of capital control is derived as a Nash perfect equilibrium of a noncooperative game with imperfect information. I conclude that a financial liberalization proposal can be supported by different coalitions of agents, according to the covariance of domestic and foreign returns and the degree of profitability of domestic industrial projects.