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Resource Extraction Contracts Under Threat of Expropriation: Theory and Evidence

Author

Listed:
  • Johannes Stroebel

    (New York University)

  • Arthur van Benthem

    (University of Pennsylvania)

Abstract

We use fiscal data on 2,468 oil extraction agreements in 38 countries to study tax contracts between resource-rich countries and independent oil companies. We analyze why expropriations occur and what determines the degree of oil price exposure of host countries. With asymmetric information about a country's expropriation cost, even optimal contracts feature expropriations. Near linearity in the oil price of real-world hydrocarbon contracts also helps to explain expropriations. We show theoretically and verify empirically that oil price insurance provided by tax contracts is increasing in a country's cost of expropriation and decreasing in its production expertise. The timing of actual expropriations is consistent with our model. © 2013 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Johannes Stroebel & Arthur van Benthem, 2013. "Resource Extraction Contracts Under Threat of Expropriation: Theory and Evidence," The Review of Economics and Statistics, MIT Press, vol. 95(5), pages 1622-1639, December.
    • Handle: RePEc:tpr:restat:v:95:y:2013:i:5:p:1622-1639
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    More about this item

    Keywords

    oil extraction; tax contracts; oil price exposure;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • 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)

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