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Profit Sharing under the Threat of Nationalization

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  • Di Corato, Luca

Abstract

A government bargains a mutually convenient agreement with a multinational corporation to extract a natural resource. The corporation bears the initial investment and earns as a return a share on the profits. The host country provides access and guarantee conditions of operation. Being the investment totally sunk, the corporation must account in its plan not only for uncertainty on 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 is feasible and leads to attain a cooperative agreement maximizing the joint venture surplus. We find that the threat of nationalization does not affect the investment time trigger but only the feasible bargaining set. Finally, we show that the optimal sharing rule results from the way the two parties may differently trade off rents with option value.

Suggested Citation

  • Di Corato, Luca, 2010. "Profit Sharing under the Threat of Nationalization," Institutions and Markets Papers 59378, Fondazione Eni Enrico Mattei (FEEM).
  • Handle: RePEc:ags:feemim:59378
    DOI: 10.22004/ag.econ.59378
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    More about this item

    Keywords

    Financial Economics;

    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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