Natural Resources and Sovereign Expropriation

39 Pages Posted: 17 Feb 2015

See all articles by Fridrik Mar Baldursson

Fridrik Mar Baldursson

Reykjavik University

Nils-Henrik M. von der Fehr

University of Oslo - Department of Economics

Date Written: February 15, 2015


A government wants to exploit a renewable resource, yielding a time-varying flow of rent, by leasing it at a fixed rate. Leasing contracts can be expropriated before expiration, albeit at a cost. To minimise transactions costs and avoid the ‘resource curse’ the government would prefer to enter into an infinitely long contract (i.e. sell the resource), if it could commit not to expropriate. However, with finite costs of expropriation credible commitment is impossible: the government either enters into finite contracts, expropriates with positive probability or does both. The value of the resource to the government is increasing in the cost of expropriation, but decreasing in the variability of the resource rent.

Keywords: Natural resources, sovereign expropriation, optimal contract length

JEL Classification: H13, Q2, D86

Suggested Citation

Baldursson, Fridrik Mar and von der Fehr, Nils-Henrik M., Natural Resources and Sovereign Expropriation (February 15, 2015). Available at SSRN: or

Fridrik Mar Baldursson (Contact Author)

Reykjavik University ( email )

Menntavegur 1
Reykjavik, 101
354-8256396 (Phone)
354-5996201 (Fax)


Nils-Henrik M. Von der Fehr

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
+47 22 85 51 40 (Phone)
+47 22 85 50 35 (Fax)

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