Resource Extraction Contracts Under Threat of Expropriation: Theory and Evidence

43 Pages Posted: 18 Feb 2010 Last revised: 7 Sep 2011

Arthur van Benthem

University of Pennsylvania - Business & Public Policy Department

Johannes Stroebel

New York University (NYU); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: May 1, 2010

Abstract

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.

Suggested Citation

van Benthem, Arthur and Stroebel, Johannes, Resource Extraction Contracts Under Threat of Expropriation: Theory and Evidence (May 1, 2010). USAEE Working Paper No. 10-042. Available at SSRN: https://ssrn.com/abstract=1554102 or http://dx.doi.org/10.2139/ssrn.1554102

Arthur Van Benthem (Contact Author)

University of Pennsylvania - Business & Public Policy Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6372
United States
215-898-3013 (Phone)

HOME PAGE: http://bepp.wharton.upenn.edu/profile/21174/

Johannes Stroebel

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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