DP6755 Determinants of Expropriation in the Oil Sector: A Theory and Evidence from Panel Data

Author(s): Sergei Guriev , Anton Kolotilin , Konstantin Sonin

Publication Date: March 2008

Keyword(s): property rights , nationalization , oil industry

JEL(s): D23 , L33 , L71 , P48

Programme Areas: Development Economics , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP6755.asp

In this paper we study nationalizations in the oil industry around the world in 1960-2002. We show, both theoretically and empirically, that governments are more likely to nationalize when oil prices are high and when political institutions are weak. We consider a simple dynamic model of the interaction between a government and a foreign oil company. The government cannot commit to abstain from expropriation and the company cannot commit to pay high taxes. Even though nationalization is inefficient it does occur in equilibrium when oil prices are high. The model's predictions are consistent with the panel analysis of a comprehensive dataset on nationalizations in the oil industry since 1960. Nationalization is more likely to happen when oil prices are high and the quality of institutions is low even when controlling for country fixed effects.