Resource Extraction Contracts Under Threat of Expropriation: Theory and Evidence
Arthur van Benthem
University of Pennsylvania - Business & Public Policy Department
New York University (NYU); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
May 1, 2010
USAEE Working Paper No. 10-042
We use unique data on 2,466 oil extraction agreements in 38 countries to study contracts between resource-rich countries and independent oil companies. We analyze why expropriations occur and what determines the degree of oil price exposure of host countries. With asymmetric information about a country's expropriation cost even optimal contracts feature expropriations. Near-linearity in the oil price of real-world hydrocarbon contracts also helps to explain expropriations. We show theoretically and verify empirically that oil price insurance provided by contracts is increasing in a country's cost of expropriation, and decreasing in its production expertise. The timing of actual expropriations is consistent with our model.
Number of Pages in PDF File: 43
Date posted: February 18, 2010 ; Last revised: September 7, 2011
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