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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.

Suggested Citation

  • Di Corato, Luca, 2013. "Profit sharing under the threat of nationalization," Resource and Energy Economics, Elsevier, vol. 35(3), pages 295-315.
  • Handle: RePEc:eee:resene:v:35:y:2013:i:3:p:295-315
    DOI: 10.1016/j.reseneeco.2013.02.004
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    Cited by:

    1. Di Corato, Luca & Hess, Sebastian, 2013. "Farmland Investments in Africa: What’s the Deal?," Working Paper Series 2013:10, Swedish University of Agricultural Sciences, Department Economics.
    2. 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.
    3. Hanna Krings, 2014. "Environmental Aspects of Resource Extraction Contracts," MAGKS Papers on Economics 201434, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

    More about this item

    Keywords

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

    JEL classification:

    • 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, Innovation, Technological Change, and Growth - - Economic Development

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