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Resource Wars and Confiscation Risk

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  • Frederick van der Ploeg

Abstract

Resource wars can be modeled with two-way regime switch uncertainty and contest success functions. Fighting is more intense if the plitical system is less cohesive, fighting technology is well developed, oil reserves are high and the wage is low. More government stability intensifies resource wars, but leads to less voracious oil depletion. Oil extraction is more aggressive in the presence of contested resources, but less so with more government stability. Our model of resource wars builds on a model of confiscation risk and of perennial political cycles. Not confiscation, but risk of confiscation matters for efficiency. Before confiscation, oil reserves are depleted too rapidly. Risk of confiscation is associated with a hold-up problem, which depresses exploration investment and exacerbates the inefficiences. A subsidy can correct for this. If there is a chance that the economy flips back to no confiscation outcomes are less distorting.

Suggested Citation

  • Frederick van der Ploeg, 2012. "Resource Wars and Confiscation Risk," OxCarre Working Papers 097, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  • Handle: RePEc:oxf:oxcrwp:097
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    References listed on IDEAS

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    More about this item

    Keywords

    resource wars; contest success functions; political cohesiveness; confiscation risk; taxation; regime switch; oil reserves uncertainty; Hotelling principle; exhaustible resources; exploration investment; hold-up problem;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)

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