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Optimal Resource Extraction Contracts under Threat of Expropriation

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  • Eduardo Engel
  • Ronald Fischer

Abstract

The government contracts with a foreign firm to extract a natural resource that requires an upfront investment and which faces price uncertainty. In states where profits are high, there is a likelihood of expropriation,which generates a social cost that increases with the expropriated value. In this environment, the planner's optimal contract avoids states with high probability of expropriation. The contract can be implemented via a competitive auction with reasonable informational requirements. The bidding variable is a cap on the present value of discounted revenues, and the firm with the lowest bid wins the contract. The basic framework is extended to incorporate government subsidies,unenforceable investment effort and political moral hazard, and the general thrust of the results described above is preserved.

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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 122247000000001833.

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Date of creation: 14 Jan 2008
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Handle: RePEc:cla:levrem:122247000000001833

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  1. Robert T. Deacon & Henning Bohn, 2000. "Ownership Risk, Investment, and the Use of Natural Resources," American Economic Review, American Economic Association, American Economic Association, vol. 90(3), pages 526-549, June.
  2. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2007. "The Basic Public Finance of Public-Private Partnerships," Documentos de Trabajo, Centro de Economía Aplicada, Universidad de Chile 235, Centro de Economía Aplicada, Universidad de Chile.
  3. Petter Osmundsen, 1998. "Dynamic Taxation of Non-renewable Natural Resources Under Asymmetric Information About Reserves," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 31(4), pages 933-951, November.
  4. Fraser, Rob & Kingwell, Ross, 1997. "Can expected tax revenue be increased by an investment-preserving switch from ad valorem royalties to a resource rent tax?," Resources Policy, Elsevier, Elsevier, vol. 23(3), pages 103-108, September.
  5. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 1998. "Least-Present-Value-of-Revenue Auctions and Highway Franchising," Documentos de Trabajo, Centro de Economía Aplicada, Universidad de Chile 37, Centro de Economía Aplicada, Universidad de Chile.
  6. Boadway, Robin & Flatters, Frank, 1993. "The taxation of natural resources : principles and policy issues," Policy Research Working Paper Series, The World Bank 1210, The World Bank.
  7. Salant, Stephen W, 1995. "The Economics of Natural Resource Extraction: A Primer for Development Economists," World Bank Research Observer, World Bank Group, World Bank Group, vol. 10(1), pages 93-111, February.
  8. Devarajan, Shantayanan & Fisher, Anthony C, 1981. "Hotelling's "Economics of Exhaustible Resources": Fifty Years Later," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 19(1), pages 65-73, March.
  9. Heaps, Terry & Helliwell, John F., 1985. "The taxation of natural resources," Handbook of Public Economics, Elsevier, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 8, pages 421-472 Elsevier.
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Cited by:
  1. Christensen, Jonas Gade, 2011. "Democracy and Expropriations," Working Papers in Economics, University of Bergen, Department of Economics 06/11, University of Bergen, Department of Economics.
  2. Chris Hajzler, 2010. "Resource-based FDI and Expropriation in Developing Economies," Working Papers, University of Otago, Department of Economics 1012, University of Otago, Department of Economics, revised Sep 2010.
  3. Christopher Hajzler, 2012. "Expropriation of foreign direct investments: sectoral patterns from 1993 to 2006," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 148(1), pages 119-149, April.
  4. Markus Ludwig, . "The Visible Hand: National Oil Companies, Oil Supply and the Ermergence of the Hotelling Rent," Working papers, Faculty of Business and Economics - University of Basel 2012/11, Faculty of Business and Economics - University of Basel.
  5. Viviana Fernández & Brian M. Lucey, 2008. "Emerging Markets Variance Shocks: Local or International in Origin?," Documentos de Trabajo, Centro de Economía Aplicada, Universidad de Chile 251, Centro de Economía Aplicada, Universidad de Chile.
  6. Claudio Raddatz, 2011. "Multilateral Debt Relief through the Eyes of Financial Markets," The Review of Economics and Statistics, MIT Press, vol. 93(4), pages 1262-1288, November.
  7. Alexandre Janiak, 2008. "Welfare in models of trade with heterogeneous firms," Documentos de Trabajo, Centro de Economía Aplicada, Universidad de Chile 253, Centro de Economía Aplicada, Universidad de Chile.
  8. Di Corato, Luca, 2010. "Profit Sharing under the Threat of Nationalization," Working Papers, Swedish University of Agricultural Sciences, Department of Economics 58292, Swedish University of Agricultural Sciences, Department of Economics.
  9. Alexandre Janiak, 2008. "A large firm model of the labor market with entry, exit and search frictions," Documentos de Trabajo, Centro de Economía Aplicada, Universidad de Chile 245, Centro de Economía Aplicada, Universidad de Chile.
  10. Hanna Krings, 2014. "Environmental Aspects of Resource Extraction Contracts," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 201434, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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