Resource Extraction Contracts Under Threat of Expropriation : Theory and Evidence

We use unique data on 2,466 oil extraction agreements in 38 countries to study 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 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