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Finders, keepers?

Niko Jaakkola, Daniel Spiro and Arthur A. van Benthem

Journal of Public Economics, 2019, vol. 169, issue C, 17-33

Abstract: Natural resource taxation and investment often exhibit cyclical behavior, driving political turmoil and shifts in power. By way of a rational-expectations model under limited commitment, we show that cycles arise endogenously from the interaction between firms' investment decisions and government taxation. Large resource revenues induce a high tax, lowering exploration investment and thereby future findings. This later leads the government to reduce tax rates, inducing high investment and high future taxes, and so on. Cycling may occur even under a government that cares about the future, but a sufficiently patient government is also able to avoid cycles altogether. Our model can thus also account for why some countries have stable resource taxation regimes. Tax differentiation on mine vintage avoids cycles as well and, surprisingly, increases government revenues. Our findings are consistent with stylized facts: we document evidence of cyclical behavior in a large number of countries with both strong and weak institutions, and provide detailed case studies of two Latin American countries. A simple empirical analysis suggests that our investment mechanism is consistent with about half of all expropriations in the oil and gas sector, the same fraction as exogenous price shocks.

Keywords: Natural resource taxation; Foreign direct investment; Expropriation; Tax cycles; Investment cycles (search for similar items in EconPapers)
JEL-codes: H25 Q35 Q38 (search for similar items in EconPapers)
Date: 2019
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Working Paper: Finders, Keepers? (2017) Downloads
Working Paper: Finders, Keepers? (2016) Downloads
Working Paper: Finders, Keepers? (2016) Downloads
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DOI: 10.1016/j.jpubeco.2018.10.007

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