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Profit sharing under the threat of nationalization

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  • Di Corato, Luca

Abstract

A multinational corporation engages in foreign direct investment for the extraction of a natural resource in a developing country. The corporation bears the initial investment and earns as a return a share of the profits. The host country provides access and guarantees conditions of operation. Since the investment is totally sunk, the corporation must account in its plan not only for uncertainty in market conditions but also for the threat of nationalization. In a real options framework, where the government holds an American call option on nationalization, we show under which conditions a Nash bargaining leads to a profit distribution maximizing the joint venture surplus. We find that the threat of nationalization does not affect the investment threshold but only the Nash bargaining solution set. Finally, we show that the optimal sharing rule results from the way the two parties may differently trade off rents with option values.

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Bibliographic Info

Article provided by Elsevier in its journal Resource and Energy Economics.

Volume (Year): 35 (2013)
Issue (Month): 3 ()
Pages: 295-315

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Handle: RePEc:eee:resene:v:35:y:2013:i:3:p:295-315

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Web page: http://www.elsevier.com/locate/inca/505569

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Keywords: Real options; Nash bargaining; Expropriation; Natural resources; Foreign direct investment;

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Cited by:
  1. Corato, Luca Di & Hess, Sebastian, 2013. "A Dynamic Stochastic Programming Framework for Modeling Large Scale Land Deals in Developing Countries," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150190, Agricultural and Applied Economics Association.
  2. Luca Di Corato & Sebastian Hess, 2014. "Farmland Investments in Africa: What’s the Deal?," Working Papers 2014.23, Fondazione Eni Enrico Mattei.

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