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Ownership Risk, Investment, and the Use of Natural Resources

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  • Bohn, Henning
  • Deacon, Robert

Abstract

The effect of insecure ownership on ordinary investment and on the exploitation of natural resources is examined. Insecure ownership is characterized as a positive probability that a typical asset or its future return will be confiscated. For empirical analysis, the probability of confiscation is modeled as a function of observable political attributes of countries, principally the type of government regime in power (democratic versus non-democratic) and the prevalence of political violence or instability. A general index of ownership security is estimated from the political determinants of economy wide investment rates, and then introduced into models of petroleum and forest use. Ownership risk is found to have a significant, and quantitatively important effect. Empirically, increases in ownership risk are associated with reductions in forest cover and with slower rates of petroleum exploration. Contrary to conventional wisdom, greater ownership risk tends to slow rates of petroleum extraction, apparently because the extraction process is capital intensive.

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  • Bohn, Henning & Deacon, Robert, 1997. "Ownership Risk, Investment, and the Use of Natural Resources," Discussion Papers dp-97-20, Resources For the Future.
  • Handle: RePEc:rff:dpaper:dp-97-20
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    More about this item

    JEL classification:

    • Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply; Prices
    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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