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Incentive Compatible Extraction of Natural Resource Rent

  • Cornelia Luchsinger

    ()

    (Center for Energy Policy and Economics CEPE, Department of Management, Technology and Economics, ETH Zurich, Switzerland)

  • Adrian Müller

    ()

    (Center for Energy Policy and Economics CEPE, Department of Management, Technology and Economics, ETH Zurich, Switzerland)

The 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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Paper provided by CEPE Center for Energy Policy and Economics, ETH Zurich in its series CEPE Working paper series with number 03-21.

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Length: 17 pages
Date of creation: Jan 2003
Date of revision:
Handle: RePEc:cee:wpcepe:03-21
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  1. Osmundsen, Petter, 2002. "Regulation of common property resources under private information about resource externalities," Resource and Energy Economics, Elsevier, vol. 24(4), pages 349-366, November.
  2. Grafton, R.Q., 1993. "Rent Capture in a Right Based Fishery," Working Papers 9306e, University of Ottawa, Department of Economics.
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  4. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, June.
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  8. Bousquet, Alain & Cremer, Helmuth & Ivaldi, Marc & Wolkowicz, Michel, 1998. "Risk sharing in licensing," International Journal of Industrial Organization, Elsevier, vol. 16(5), pages 535-554, September.
  9. Chavas, Jean-Paul, 1993. "The Ricardian Rent and the Allocation of Land under Uncertainty," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 20(4), pages 451-69.
  10. Fraser, Rob, 2000. "Is risk-sharing resource taxation in society's best interests if prices are log-normally distributed?," Resources Policy, Elsevier, vol. 26(4), pages 219-225, December.
  11. Garnaut, Ross & Clunies Ross, Anthony, 1975. "Uncertainty, Risk Aversion and the Taxing of Natural Resource Projects," Economic Journal, Royal Economic Society, vol. 85(338), pages 272-87, June.
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  13. Heaps, Terry & Helliwell, John F., 1985. "The taxation of natural resources," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 8, pages 421-472 Elsevier.
  14. Sappington, David E. M. & Weisman, Dennis L., 1996. "Revenue sharing in incentive regulation plans," Information Economics and Policy, Elsevier, vol. 8(3), pages 229-248, September.
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  16. Eirik S. Amundsen & Christian Andersen & Jan Gaute Sannarnes, 1992. "Rent Taxes on Norwegian Hydropower Generation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 97-116.
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