Incentive Compatible Extraction of Natural Resource Rent
AbstractThe exploitation of natural resources often generates considerable economic rent. Since such so-called resource rents accrue due to innate characteristics of the resource itself thus reflecting its eco-nomic value and not due to managerial abilities of the exploiting firm, at least part of it should - as a price for the use of the resource – be collected by the owner of the resource, which is often the gov-ernment. As the owner of the resource faces a classical principal-agent problem, the incentives to exploit a resource efficiently should be taken into account when setting up a rent extraction scheme. We pre-sent a formalism that unifies different existing approaches to such schemes and address issues such as asymmetric information, risk aversion, and uncertainty. Finally, we discuss the feasibility to base a rent extraction scheme on such a formalism and point out its main problems. The most important ones are the presence of intrinsically unobservable and very uncertain values and the high complexity of the formalism. There are mainly two possibilities to deal with these problems: either to make additional as-sumptions and to set boundary conditions such as to solve the problem in a simplified setting, as much of the literature does, or to refrain from solving it, and instead use it as a general guiding principle, which helps to avoid gross errors and shows the broad direction, but leaves the concrete implementa-tion rather to a political process than to an economic analysis.
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Bibliographic InfoPaper provided by CEPE Center for Energy Policy and Economics, ETH Zurich in its series CEPE Working paper series with number 03-21.
Length: 17 pages
Date of creation: Jan 2003
Date of revision:
natural resource rent; incentives; rent extraction; regulation;
Find related papers by JEL classification:
- Q00 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - General
- Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
- R52 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Land Use and Other Regulations
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
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