TY  - JOUR
AU  - Engel,Eduardo
AU  - Fischer,Ronald
TI  - Optimal Resource Extraction Contracts Under Threat of Expropriation
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13742
PY  - 2008
Y2  - January 2008
UR  - http://www.nber.org/papers/w13742
L1  - http://www.nber.org/papers/w13742.pdf
N1  - Author contact info:
Eduardo Engel
Yale University
Department of Economics
P.O. Box 208268
New Haven, CT  06520-8268
Tel: 203/432-5595
Fax: 203/432-5779
E-Mail: eduardo.engel@yale.edu

Ronald Fischer
Centro de Economia Aplicada (CEA)
Departamento de Ingenieria Industrial
Universidad de Chile
Republica 701 Santiago CHILE
E-Mail: rfischer@dii.uchile.cl
AB  - 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.
ER  -