I'll pay you later: Relational Contracts in the Oil Industry

Elena Paltseva, Gerhard Toews and Marta Troya Martinez

No 17121, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Contracts between governments and international firms are difficult to enforce, especially under weak institutions: governments are tempted to renegotiate tax payments after investments occurred. Theoretically, such a hold-up problem is solved by using self-enforcing agreements that increase the value of sustaining the relationship over time. By delaying production, tax payments and investments, firm's threat to terminate following a renegotiation becomes more effective. Using rich proprietary data on the oil and gas industry, we show that contracts between the oil majors and petro-rich economies with weak institutions are indeed delayed relative to countries with strong institutions. To push for a causal interpretation, we show that this backloading in countries with weak institutions only emerges in early 1970s. We attribute this to a change in the international view towards countries' sovereignty over natural resources brought by decolonization. This new world order made it politically difficult for developed countries to continue the established practice of military interventions to back up the enforcement of the contracts of their oil firms. Fading of (military) enforcement, together with the absence of local legal enforcement, triggered the need to backload the contracts.

Keywords: Relational contracts; Dynamic incentives; Political economy; Institutions; Oil (search for similar items in EconPapers)
JEL-codes: D02 D86 H20 L14 P48 Q30 (search for similar items in EconPapers)
Date: 2022-03
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