<p>Institutional risk does not merely reduce the level of investment—it reshapes its composition. This paper shows that when institutional forces reduce the expected cash flows of committed capital, entrepreneurs substitute toward more versatile but less productive configurations and shorter investment horizons. The sensitivity of any project to this distortion is multiplicative in the specificity of its stages and the duration of the project. In a repeated setting, specific capital attracts further institutional risk, and the equilibrium level of specialization falls below what static analysis predicts. The economy operates inside its productivity frontier because the institutional environment makes the most productive investments unattractive.</p>