Resource Extraction Contracts Under Threat of Expropriation: Theory and Evidence

We use fiscal data on 2,468 oil extraction agreements in 38 countries to study tax contracts between resource-rich countries and independent oil companies. We analyze why expropriations occur and what determines the degree of oil price exposure of host countries. With asymmetric information about a country’s expropriation cost even optimal contracts feature expropriations. Near-linearity in the oil price of real-world hydrocarbon contracts also helps to explain expropriations. We show theoretically and verify empirically that oil price insurance provided by tax contracts is increasing in a country’s cost of expropriation, and decreasing in its production expertise. The timing of actual expropriations is consistent with our model. ∗We would like to thank Manuel Amador, Chris Heady, Suzi Kerr, Theresa Kuchler, Seema Jayachandran, John B. Taylor, Kester Tong and Frank Wolak, and two anonymous referees for helpful comments and suggestions. Special thanks go to Ran Abramitzky, Douglas Bernheim and Caroline Hoxby for their extensive advice. We also thank seminar participants at Stanford University, the University of California at Berkeley Energy Institute, and the CESifo Venice Summer Institute on Taxation in Developing Countries. We are grateful to Richard Lines and WoodMackenzie for generous provision of access to their Global Economic Model (GEM). Stroebel was supported by the Kohlhagen Fellowship through a grant to the Stanford Institute for Economic Policy Research. Van Benthem was supported by a Stanford Graduate Fellowship. †Department of Economics, Stanford University, 579 Serra Mall, Stanford, CA 94305-6072, [email protected] ‡Department of Economics, Stanford University, 579 Serra Mall, Stanford, CA 94305-6072, [email protected]