On quota violations of OPEC members

Hamed Ghoddusi, Masoud Nili and Mahdi Rastad

Energy Economics, 2017, vol. 68, issue C, 410-422

Abstract: Over the last decades quota violations have become a norm for OPEC countries. However, the academic literature on OPEC focuses more on its production behavior than on analyzing the quota allocation process or characterizing quota violation patterns. This paper offers a theoretical model with empirical evidence to explain OPEC members' incentives for abiding or violating quotas. We first offer a cartel model with a quota allocation rule and an endogenous capacity choice. The model highlights the trade-off between building spare capacity to bargain for a higher legitimate quota versus risking quota violation punishment. Using the quarterly data from 1995 to 2007, we empirically support the main results and intuitions for the model. Our empirical evidence is consistent with a theoretical framing in which capacity constraints work as an enforcement mechanism in good times and OPEC's quota system disciplining its members in bad times.

Keywords: Energy; OPEC; Cartels; Oil market; Compliance; Quota; Cournot duopoly; Collusion (search for similar items in EconPapers)
JEL-codes: L13 Q35 Q41 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:68:y:2017:i:c:p:410-422

DOI: 10.1016/j.eneco.2017.10.016

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