On Quota Violations of OPEC Members

45 Pages Posted: 10 Oct 2017 Last revised: 12 Oct 2017

See all articles by Hamed Ghoddusi

Hamed Ghoddusi

California State Polytechnic University, San Luis Obispo; Economic Research Forum

Masoud Nili

Sharif University of Technology

Mahdi Rastad

Orfalea College of Business, California State Polytechnic University

Date Written: October 10, 2017

Abstract

Over the last decades quota violations have become a norm for OPEC countries. However, the academic literature on OPEC focuses more on its production behavior than on analyzing the quota allocation process or characterizing quota violation patterns. This paper covers a theoretical model with empirical evidence to explain OPEC members’ incentives for abiding or violating quotas. We first cover a cartel model with a quota allocation rule and an endogenous capacity choice. The model highlights the trade-off between building spare capacity to bargain for a higher legitimate quota versus risking quota violation punishment. Using the quarterly data from 1995 to 2007, we empirically support the main results and intuitions for the model. Our empirical evidence is consistent with a theoretical framing in which capacity constraints work as an enforcement mechanism in good times and OPEC’s quota system disciplining its members in bad times.

Keywords: Energy; OPEC; Cartels; Oil Market; Compliance; Quota; Cournot Duopoly; Collusion

JEL Classification: D40; L13; Q4

Suggested Citation

Ghoddusi, Hamed and Nili, Masoud and Rastad, Mahdi, On Quota Violations of OPEC Members (October 10, 2017). Available at SSRN: https://ssrn.com/abstract=3050369 or http://dx.doi.org/10.2139/ssrn.3050369

Hamed Ghoddusi

California State Polytechnic University, San Luis Obispo ( email )

San Luis Obispo, CA 93407
United States

Economic Research Forum ( email )

Cairo
Egypt

Masoud Nili

Sharif University of Technology ( email )

Tehran
Iran

Mahdi Rastad (Contact Author)

Orfalea College of Business, California State Polytechnic University ( email )

San Luis Obispo, CA 93407
United States

HOME PAGE: http://www.cob.calpoly.edu/faculty/mahdi-rastad/

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