Business Economics and Public Policy Papers

Document Type

Journal Article

Date of this Version

12-2013

Publication Source

The Review of Economics and Statistics

Volume

95

Issue

5

Start Page

1622

Last Page

1639

DOI

10.1162/REST_a_00333

Abstract

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.

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Date Posted: 27 November 2017

This document has been peer reviewed.