IDEAS home Printed from https://ideas.repec.org/p/ecl/yaleco/34.html
   My bibliography  Save this paper

Optimal Resource Extraction Contracts under Threat of Expropriation

Author

Listed:
  • Engel, Eduardo

    (Yale U)

  • Fischer, Ronald

    (U of Chile)

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.

Suggested Citation

  • Engel, Eduardo & Fischer, Ronald, 2008. "Optimal Resource Extraction Contracts under Threat of Expropriation," Working Papers 34, Yale University, Department of Economics.
    • Handle: RePEc:ecl:yaleco:34
    as

    Download full text from publisher

    File URL: http://economics.yale.edu/sites/default/files/files/Working-Papers/wp000/ddp0034.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2013. "The Basic Public Finance Of Public–Private Partnerships," Journal of the European Economic Association, European Economic Association, vol. 11(1), pages 83-111, February.
    2. 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.
    3. Robert T. Deacon & Henning Bohn, 2000. "Ownership Risk, Investment, and the Use of Natural Resources," American Economic Review, American Economic Association, vol. 90(3), pages 526-549, June.
    4. 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.
    5. Robin Boadway & Frank Flatters, 2023. "The Taxation of Natural Resources: Principles and Policy Issues," Springer Books, in: Anwar Shah (ed.), Taxing Choices for Managing Natural Resources, the Environment, and Global Climate Change, chapter 0, pages 17-81, Springer.
    6. 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.
    7. Salant, Stephen W, 1995. "The Economics of Natural Resource Extraction: A Primer for Development Economists," The World Bank Research Observer, World Bank, vol. 10(1), pages 93-111, February.
    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.
    9. Harold Hotelling, 1931. "The Economics of Exhaustible Resources," Journal of Political Economy, University of Chicago Press, vol. 39(2), pages 137-137.
    10. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Leiva, Benjamin, 2020. "Natural resource rent allocation, government quality, and concession design: The case of copper in Chile," Resources Policy, Elsevier, vol. 68(C).
    2. Alexandre Janiak, 2008. "Welfare in models of trade with heterogeneous firms," Documentos de Trabajo 253, Centro de Economía Aplicada, Universidad de Chile.
    3. David Martimort & Jérôme Pouyet & Francesco Ricci, 2018. "Extracting information or resource? The Hotelling rule revisited under asymmetric information," RAND Journal of Economics, RAND Corporation, vol. 49(2), pages 311-347, June.
    4. Croutzet, Alexandre & Lasserre, Pierre, 2017. "Optimal completeness of property rights on renewable resources in the presence of market power," Resource and Energy Economics, Elsevier, vol. 49(C), pages 16-32.
    5. Hanna Krings, 2014. "Environmental Aspects of Resource Extraction Contracts," MAGKS Papers on Economics 201434, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    6. Di Corato, Luca, 2013. "Profit sharing under the threat of nationalization," Resource and Energy Economics, Elsevier, vol. 35(3), pages 295-315.
    7. 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.
    8. Claudio Raddatz, 2011. "Multilateral Debt Relief through the Eyes of Financial Markets," The Review of Economics and Statistics, MIT Press, vol. 93(4), pages 1262-1288, November.
    9. Christensen, Jonas Gade, 2011. "Democracy and Expropriations," Working Papers in Economics 06/11, University of Bergen, Department of Economics.
    10. Ludwig, Markus, 2012. "The Visible Hand: National Oil Companies, Oil Supply and the Ermergence of the Hotelling Rent," Working papers 2012/11, Faculty of Business and Economics - University of Basel.
    11. Christopher Hajzler, 2012. "Expropriation of foreign direct investments: sectoral patterns from 1993 to 2006," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 148(1), pages 119-149, April.
    12. Hajzler, Christopher, 2014. "Resource-based FDI and expropriation in developing economies," Journal of International Economics, Elsevier, vol. 92(1), pages 124-146.
    13. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Vining, Aidan R. & Moore, Mark A., 2017. "Potash ownership and extraction: Between a rock and a hard place in Saskatchewan," Resources Policy, Elsevier, vol. 54(C), pages 71-80.
    2. Ulibarri, Carlos A., 1996. "Non-conventional fuel tax credits and the extraction R&D model," Resources Policy, Elsevier, vol. 22(3), pages 207-215, September.
    3. Smith, James L., 2013. "Issues in extractive resource taxation: A review of research methods and models," Resources Policy, Elsevier, vol. 38(3), pages 320-331.
    4. Gonzalez, Patrick, 2013. "Taxing a Natural Resource with a Minimum Revenue Requirement," Working Papers 158572, University of Laval, Center for Research on the Economics of the Environment, Agri-food, Transports and Energy (CREATE).
    5. Sylvain Rossiaud, 2015. "L’ouverture de l’amont pétrolier à des compagnies privées. Un cadre d’analyse en termes d’économie des coûts de transaction," Post-Print hal-01162793, HAL.
    6. David Martimort & Flavio Menezes & Myrna Wooders & ELISABETTA IOSSA & DAVID MARTIMORT, 2015. "The Simple Microeconomics of Public-Private Partnerships," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(1), pages 4-48, February.
    7. Eduardo Ley & Molly K. Macauley & Stephen W. Salant, "undated". "Spatially and intertemporally efficient waste management: The costs of interstate flow control," Working Papers 97-07, FEDEA.
    8. Hansen, James & Gross, Isaac, 2018. "Commodity price volatility with endogenous natural resources," European Economic Review, Elsevier, vol. 101(C), pages 157-180.
    9. Franco, Marco P.V. & Gaspard, Marion & Mueller, Thomas, 2019. "Time discounting in Harold Hotelling's approach to natural resource economics: The unsolved ethical question," Ecological Economics, Elsevier, vol. 163(C), pages 52-60.
    10. D.B. Thornton, 1991. "Discussion of “Master limited partnerships: An examination of dividend distribution policy†," Contemporary Accounting Research, John Wiley & Sons, vol. 7(2), pages 424-430, March.
    11. David Martimort & Flavio Menezes & Myrna Wooders & FLÁVIO MENEZES & MATTHEW RYAN, 2015. "Default and Renegotiation in Public-Private Partnership Auctions," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(1), pages 49-77, February.
    12. Baños-Pino, José F. & Boto-García, David & Zapico, Emma, 2021. "Persistence and dynamics in the efficiency of toll motorways: The Spanish case," Efficiency Series Papers 2021/03, University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG).
    13. Benjamin Jones & Michael Keen & Jon Strand, 2013. "Fiscal implications of climate change," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(1), pages 29-70, February.
    14. Osmel Manzano & Francisco Monaldi, 2008. "The Political Economy of Oil Production in Latin America," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2008), pages 59-103, August.
    15. Fay, Marianne & Martimort, David & Straub, Stéphane, 2021. "Funding and financing infrastructure: The joint-use of public and private finance," Journal of Development Economics, Elsevier, vol. 150(C).
    16. Winston, Clifford & Yan, Jia, 2011. "Can privatization of U.S. highways improve motorists' welfare?," Journal of Public Economics, Elsevier, vol. 95(7), pages 993-1005.
    17. Brazee, Richard J. & Southgate, Douglas, 1993. "A Mathematical Model For Developing Ethno-Biologically Diverse Tropical Forests," Working Papers 11895, Environmental and Natural Resources Policy Training Project.
    18. Soren T. Anderson & Ryan Kellogg & Stephen W. Salant, 2018. "Hotelling under Pressure," Journal of Political Economy, University of Chicago Press, vol. 126(3), pages 984-1026.
    19. Moszoro Marian W., 2018. "Public–Private Monopoly," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 18(2), pages 1-15, April.
    20. Smith, James L., 2012. "On the portents of peak oil (and other indicators of resource scarcity)," Energy Policy, Elsevier, vol. 44(C), pages 68-78.

    More about this item

    JEL classification:

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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecl:yaleco:34. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/edyalus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.