Resource Wars and Confiscation Risk

Resource wars can be modeled with two-way regime switch uncertainty and contest success functions. Fighting is more intense if the plitical system is less cohesive, fighting technology is well developed, oil reserves are high and the wage is low. More government stability intensifies resource wars, but leads to less voracious oil depletion. Oil extraction is more aggressive in the presence of contested resources, but less so with more government stability. Our model of resource wars builds on a model of confiscation risk and of perennial political cycles. Not confiscation, but risk of confiscation matters for efficiency. Before confiscation, oil reserves are depleted too rapidly. Risk of confiscation is associated with a hold-up problem, which depresses exploration investment and exacerbates the inefficiences. A subsidy can correct for this. If there is a chance that the economy flips back to no confiscation outcomes are less distorting.