Optimal Resource Extraction Contracts Under Threat of Expropriation

33 Pages Posted: 24 Jan 2008 Last revised: 21 Jul 2021

See all articles by Eduardo M. R. A. Engel

Eduardo M. R. A. Engel

Yale University - Department of Economics; National Bureau of Economic Research (NBER)

Ronald D. Fischer

University of Chile - Center of Applied Economics (CEA)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2008

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 M. and Fischer, Ronald D., Optimal Resource Extraction Contracts Under Threat of Expropriation (January 2008). NBER Working Paper No. w13742, Available at SSRN: https://ssrn.com/abstract=1086993

Eduardo M. Engel (Contact Author)

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Ronald D. Fischer

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