Resource Extraction Contracts Under Threat of Expropriation: Theory and Evidence
43 Pages Posted: 18 Feb 2010 Last revised: 7 Sep 2011
Date Written: May 1, 2010
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: Suggested Citation