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Optimal Resource Extraction Contracts under Threat of Expropriation

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Author Info
Eduardo Engel () (Cowles Foundation, Yale University)
Ronald Fischer (University of Chile)

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Abstract

The government contracts with a foreign firm to extract a natural resource that requires an upfront investment and which faces price uncertainty. In states where profits are high, there is a likelihood of expropriation, which generates a social cost that increases with the expropriated value. In this environment, the planner's optimal contract avoids states with high probability of expropriation. The contract can be implemented via a competitive auction with reasonable informational requirements. The bidding variable is a cap on the present value of discounted revenues, and the firm with the lowest bid wins the contract. The basic framework is extended to incorporate government subsidies, unenforceable investment effort and political moral hazard, and the general thrust of the results described above is preserved.

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File URL: http://cowles.econ.yale.edu/P/cd/d16a/d1636.pdf
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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 1636.

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Length: 32 pages
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:cwl:cwldpp:1636

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Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
Phone: (203) 432-3702
Fax: (203) 432-6167
Web page: http://cowles.econ.yale.edu/
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Related research
Keywords: Taxation; Mining; Rent extraction; Royalty; Non-renewable natural resource; Present-value-of-revenue auction;

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Find related papers by JEL classification:
Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)
Q34 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Natural Resources and Domestic and International Conflicts
Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Boadway, Robin & Flatters, Frank, 1993. "The taxation of natural resources : principles and policy issues," Policy Research Working Paper Series 1210, The World Bank. [Downloadable!]
  2. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2007. "The Basic Public Finance of Public-Private Partnerships," Documentos de Trabajo 234, Centro de Economía Aplicada, Universidad de Chile. [Downloadable!]
    Other versions:
  3. Devarajan, Shantayanan & Fisher, Anthony C, 1981. "Hotelling's "Economics of Exhaustible Resources": Fifty Years Later," Journal of Economic Literature, American Economic Association, vol. 19(1), pages 65-73, March. [Downloadable!] (restricted)
  4. Salant, Stephen W, 1995. "The Economics of Natural Resource Extraction: A Primer for Development Economists," World Bank Research Observer, Oxford University Press, vol. 10(1), pages 93-111, February.
  5. Fraser, Rob & Kingwell, Ross, 1997. "Can expected tax revenue be increased by an investment-preserving switch from ad valorem royalties to a resource rent tax?," Resources Policy, Elsevier, vol. 23(3), pages 103-108, September. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
  7. Henning Bohn & Robert T. Deacon, 2000. "Ownership Risk, Investment, and the Use of Natural Resources," American Economic Review, American Economic Association, vol. 90(3), pages 526-549, June. [Downloadable!] (restricted)
    Other versions:
  8. Petter Osmundsen, 1998. "Dynamic Taxation of Non-renewable Natural Resources Under Asymmetric Information About Reserves," Canadian Journal of Economics, Canadian Economics Association, vol. 31(4), pages 933-951, November. [Downloadable!] (restricted)
  9. Eduardo M. R. A. Engel & Ronald D. Fischer & Alexander Galetovic, 2001. "Least-Present-Value-of-Revenue Auctions and Highway Franchising," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 993-1020, October. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alexandre Janiak, 2008. "Welfare in models of trade with heterogeneous firms," Documentos de Trabajo 253, Centro de Economía Aplicada, Universidad de Chile. [Downloadable!]
  2. Alexandre Janiak, 2008. "A large firm model of the labor market with entry, exit and search frictions," Documentos de Trabajo 245, Centro de Economía Aplicada, Universidad de Chile. [Downloadable!]
  3. Viviana Fernández & Brian M. Lucey, 2008. "Emerging Markets Variance Shocks: Local or International in Origin?," Documentos de Trabajo 251, Centro de Economía Aplicada, Universidad de Chile. [Downloadable!]
  4. Raddatz, Claudio, 2009. "Multilateral debt relief through the eyes of financial markets," Policy Research Working Paper Series 4872, The World Bank. [Downloadable!]
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