Profit Sharing under the Threat of Nationalization
AbstractA 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 of rents with option values.
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Bibliographic InfoPaper provided by Swedish University of Agricultural Sciences, Department of Economics in its series Working Papers with number 58292.
Date of creation: 2010
Date of revision:
Real Options; Nash Bargaining; Expropriation; Natural Resources; Foreign Direct Investment; International Relations/Trade; Resource /Energy Economics and Policy; C7; D8; K3; F2; O1;
Other versions of this item:
- Luca Di Corato, 2010. "Profit Sharing under the Threat of Nationalization," Working Papers 2010.5, Fondazione Eni Enrico Mattei.
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- K3 - Law and Economics - - Other Substantive Areas of Law
- F2 - International Economics - - International Factor Movements and International Business
- O1 - Economic Development, Technological Change, and Growth - - Economic Development
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-03-28 (All new papers)
- NEP-CFN-2010-03-28 (Corporate Finance)
- NEP-ENE-2010-03-28 (Energy Economics)
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