Natural resource taxation and investment often exhibit cyclical behavior, associated with shifts in political power. Why do finders get to keep more of their discoveries in some periods than others? We show such cycles result from the inability of governments to commit to future taxes and firms to commit to credibly exiting a country for good. In a cycle, large resource revenues induce a high tax which lowers exploration investment and thereby future findings, which in turn leads governments to reduce tax rates again. Tax oscillations are more pronounced for resources which take longer to develop, or following temporary resource price shocks. Our tractable model provides the first rational-expectations explanation of resource tax cycles under endogenous exploration investment and threat of expropriation. We document evidence of cyclical behavior in several countries with both strong and weak institutions, and provide detailed case studies of two Latin American countries.
You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.
Document Object Identifier (DOI): 10.3386/w22421