Natural resources and sovereign expropriation

Fridrik M. Baldursson & Nils-Henrik M. von der Fehr

Photo: Journal of Environmental Economics and Management

Published in:

Journal of Environmental Economics and Management, Volume 92, November 2018.

DOI: 10.1016/j.jeem.2017.08.004

Abstract

A government wants to exploit a renewable resource, yielding a time-varying flow of rent, by leasing it. Leasing contracts can be expropriated before expiration, albeit at a cost. To minimise transactions costs and avoid the ‘resource trap’ 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.

Published July 19, 2019 1:57 PM - Last modified July 19, 2019 1:57 PM