Optimal Resource Extraction Contracts under Threat of Expropriation

Eduardo Engel and Ronald Fischer

No 1636, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

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.

Keywords: Taxation; Mining; Rent extraction; Royalty; Non-renewable natural resource; Present-value-of-revenue auction (search for similar items in EconPapers)
JEL-codes: H21 H25 Q33 Q34 Q38 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2008-01
New Economics Papers: this item is included in nep-ene, nep-env and nep-ppm
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Citations: View citations in EconPapers (14)

Published in W. Hogan and F. Sturzenegger (eds.), The Natural Resource Trap, Cambridge: MIT Press, 2010

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Related works:
Working Paper: Optimal Resource Extraction Contracts Under Threat of Expropriation (2008)
Working Paper: Optimal Resource Extraction Contracts under Threat of Expropriation (2008)
Working Paper: Optimal Resource Extraction Contracts under Threat of Expropriation (2008)
Working Paper: Optimal resource extraction contracts under threat of expropriation (2008)
Working Paper: Optimal Resource Extraction Contracts Under Threat of Expropriation (2008)
Working Paper: Optimal Resource Extraction Contracts Under Threat of Expropriation (2008)
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