Centre for Economic and Financial Research at New Economic School

February 2008

Determinants of Expropriation in the Oil Sector: ATheory and Evidence from Panel Data

Sergei Gurievy Anton Kolotilin Konstantin Sonin

Working Paper No 115

CEFIR / NES Working Paper series

DeterminantsofExpropriationintheOilSector: ATheoryandEvidencefromPanelData_
SergeiGuriev y NewEconomicSchool AntonKolotilin MIT KonstantinSonin NewEconomicSchool

Abstract Inthispaperwestudynationalizationsintheoilindustryaroundtheworldin1960-2002. Weshow,boththeoreticallyandempirically,thatgovernmentsaremorelikelytonationalize whenoilpricesarehighandwhenpoliticalinstitutionsareweak.Weconsiderasimpledynamic modeloftheinteractionbetweenagovernmentandaforeignoilcompany.Thegovernment cannotcommittoabstainfromexpropriationandthecompanycannotcommittopayhigh taxes.Eventhoughnationalizationisinecientitdoesoccurinequilibriumwhenoilpricesare high.Themodelspredictionsareconsistentwiththepanelanalysisofacomprehensivedataset onnationalizationsintheoilindustrysince1960.Nationalizationismorelikelytohappenwhen oilpricesarehighandthequalityofinstitutionsislowevenwhencontrollingforcountry xed eects. JELCodes:D23,L33,L71,P48.

ThisworkhasoriginatedfromKolotilinsthesisattheNewEconomicSchool.WearegratefultoStephen
Kobrinforprovidinguswithdataonnationalizations.WethankVictorChernozhukov,EkaterinaZhuravskayaand conferenceparticipantsinBeijingforhelpfulcomments.
y Correspondingauthor:SergeiGuriev,NewEconomicSchool,Nakhimovskypr.47,Moscow117418,Russia.

E-mail:sguriev@nes.ru

1Introduction
Inrecentyearswehavewitnessedaphenomenonthathasnotbeenobservedsince1970s:the
forcednationalizationofmajor,foreign-ownedoilassetsinVenezuela,Bolivia,EcuadorandRussia. Kazakhstan,too,isdiscussingtheexpropriationofalargeoileld(NewYorkTimes,2007).1The issueofforcednationalizationsgoesbacktothemostimportantquestionineconomics:ifproperty rightsaresovitalforeconomiceciency,whyaretheysohardtouphold?ThecelebratedCoase theoremimpliesthatifagovernmentislessecientinproduction,itwouldsellthepropertyrights tothemostecientproducer.Theprivatizationliterature(seeasurveyinMegginson,2005) impliesthatswitchingtoprivateownershipdoesincreaseproductivee ciency.Intheoilsector, theextensiveanecdotalevidence(e.g.Yergin,1991)showsthatthisargumentisprobablyeven morerelevantthaninotherindustries.Duetotheireconomiesofscaleandbetterhumancapital, multinationaloilcompanieshavebeenmoreecient;expropriationsgaverisetolossesofoutput andnationalincome.InMexicoin1938andinIranin1951expropriationsnotonlyresultedina declineingrowthrates,butwerealsofollowedbyadeclineinoutputandwagesintheindustry. Inastrikingexample,SaudiArabia,oneoftheleadingoil-exportersintheworld,percapitaGDP havebeenfallingorstagnatingfor25years,1978-2003,andisnowonlyahalfofwhatitusedto bein1970s.

Inthispaper,weanalyzethedeterminantsofoilnationalizationsaroundtheworld.One
immediateobservationisthatthenationalizationofoilcompaniestakesplacewhenoilpriceswere high(Figure1).Specically,mostexpropriationstookplacein1970s,whenoilpriceswereat historicallyhighlevels.Oncetheoilpricecamedowninthe1980sand1990s,theexpropriations virtuallydisappearedandreemergedonlyinthelastdecadewhenoilpricesclimbedbackto1970s levels.

Ontheonehand,itseemsnaturalthatthehighertheoilprice,themorevaluabletheoilassets
1

Lastyear,theU.S.CongressionalResearchServicereportforCongressontheroleofnationaloilcompanies

openedwiththefollowingstatement:InJune2007,ExxonMobilCorporationandConocoPhillips,twoofthelargest U.S.oilcompanies,abandonedtheirmulti-billiondollarinvestmentsintheheavyoildepositsoftheOrinocobasinin Venezuela.ThisactionfollowedthebreakdownofnegotiationsbetweenthecompaniesandthegovernmentofPresidentHugoChavezandPetroleosdeVenezuela(PDV),theVenezuelannationaloilcompany.Fourotherinternational oilcompanies,includingTotalSAfromFrance,StatoilfromNorway,BPfromGreatBritain,andChevronfromthe UnitedStates,acceptedagreementsthatraisedthePDVshareintheirOrinocoprojectsfromapproximately40%to acontrollinginterestofabout78%.Inthesamesummer2007,TNK-BP,aRussiansubsidiaryofBPhadtosell amajorstakeinitsoilbusinesstothenationalgasmonopolyGazprom.Beforethat,inDecember2006,Gazprom acquireda50%-plus-one-sharestakeinSakhalin-2oileldfromRoyalDutchShellaftertheinternationalmajorfaced prosecutionfromthestateenvironmentalagency.

Figure1:Numberofexpropriationsintheoilindustryandtheoilpriceshock(deviationfromthe
long-termpricetrend(11))in1910-2006.

andthestrongertheincentivestoexpropriate.Ontheotherhand,giventhecostsofexpropriation,
itisnotimmediatelyclearwhyagovernmentwouldrespondtoapositiveoilpriceshockwith expropriationratherthanjustwithimposinghighertaxes.Contracttheoryimpliesthatthegovernmentisbetterokeepingpropertyrightsintactandtaxingtheoilcompanies rents.Usingtaxes contingenton(observableandveriable)oilprices,thegovernmentcanpreserveoilcompanies incentivesforinvestmentinneweldsandcost-reducingtechnologies.Thisstraightforwardsolution, however,reliesontheexternalenforcementofcontractswhichisnotthecase:thegovernmentis bothanenforcerandacontractingparty.Therefore,thiscontractshouldbetreatedasarelational contract(seeBakeretal.,1994,2002).Thecontractisself-enforced.Theonlyprotectionforthe privatecompanyisthegovernmentsdesiretobenetfromthemoreecientproductioninthe futureandchecksandbalanceswithinthegovernment.

Analysisofthisrelationalcontractresultsinasimpleprediction:whencurrentoilpriceishigh,
(inecient)expropriationsmaytakeplaceinequilibrium.Inthiscasetheimmediateprizeistoo valuablerelativetofuturerevenues.Eachpartysself-enforcementconstraintishardertomeet, andthelogicofrelationalcontractingfallsapart.Therefore,weshouldexpectmoreexpropriations

inperiodsofhigheroilprices.Anotherpredictionisthatexpropriationismorelikelywhenever therearefewerchecksonthegovernmentsothatthelatterndsithardtocommit.Italsofollows 2

thatanincreaseinthemanagerialandtechnicalcapabilitiesofoil-producingcountriesincreasesthe
governmentsoutsideoptioninthecaseofexpropriationandthusincreasestheriskofexpropriation. Wetestthesepredictionsusingthedataonalltheexpropriationsofforeign-ownedoilcompanies aroundtheworldin1960-2002.Wefocusonoilastheexpropriationsofoilcompaniesarehighproleeventsandrelativelyeasytotoobserveandquantify.Also,oilisagloballytradedcommodity withalongtimeseriesofprices.Weshowthatexpropriationsareindeedmorelikelytotake placewhenoilprice(controllingforitslong-termtrend)ishighandincountry-yearswhereand whenpoliticalinstitutionsareweak.Theresultsholdforbothmeasuresofinstitutionsthatwe use(constraintsontheexecutiveandthelevelofdemocracyfromthePolityIVdataset).Most importantly,theresultsholdevenifwecontrolforcountryxedeects;inotherwords,inagiven country,expropriationisthelikeliertheweakerthiscountrysinstitutions.

Oureconometricresultsareconsistentwiththerichanecdotalevidenceavailableintheexisting
literature.Yergin(1991)providesadetailednarrativeofmajoreventsintheoilindustry,paying particularattentiontothefateofinternationaloilmajors.Kobrin(1980,1984a,b)arguesthatone ofthedrivingforcesofthewavesofexpropriationsfrom1960-70wastherisingdesireofgovernments totakemorecontrolovertheeconomy;however,itisunclearwhydirectcontrolovertheresourceextractingindustrynecessarilystrengthensthestate.Whenstatecapacitytocontroltheeconomy increasedinlate1970s,thenumberofexpropriationsfelldramatically.Kobrin(1985)emphasizes thatonceonegovernmentexpropriates,thereisavisibledominoeect.Otheroil-exporting governmentslearnfromtheexperience.Notethatthisargumentisendogenoustothee ectof world-wideoilpricesonincentivestoexpropriate.Moran(1973)describeshowinternationaltreaties mayincreasecostsofexpropriation.Williams(1975)estimatestheamountofexpropriationsof foreignowners,bothwithandwithoutcompensation,indevelopingcountriesfrom1956to1972. Therearealsoafewpapersonthetheoryofexpropriationrisk.BohnandDeacon(2000)study howpropertyrightsprotectionaectsinvestmentandproductionintheoilindustry.Ifthereis ariskofexpropriation,whichismodelledasanexogenousprobabilityinadynamicmodel, rms underinvestinlong-termproductioncapacity,whiletryingtoextractandsellresourcesine ciently early.BohnandDeaconusecross-sectionalevidencetoshowthatthersteectdominates,and insecureownershiprightsresultinunder-ratherthanoverinvestment.InThomasandWorrall (1994),armandastateareinvolvedinmulti-periodinteractionintheenvironmentwithpoorly protectedpropertyrights.Thestate,whichcannotproduceonitsown,canexpropriatethe rms

one-periodproceedsbutgetsnothinginsubsequentperiods.Thermhasallthebargainingpower

buthasnoaccesstotherevenuegeneratedbyoilsale.Initially,thermunderinvests,butinthelong 3

runinvestsatthesociallyoptimallevelforcertainparametervalues.Inourmodel,thegovernment
canproduceonitsown,albeitlessecientlythantheprivaterm,andthegovernment,rather thantherm,hasfullbargainingpower.Mostcrucially,boththegovernmentandtheprivaterm arebothabletoproduceandobtainrevenueontheirown.Asaresult,whenoilpricesarehigh, expropriationdoesoccurinequilibrium,unlikeinThomasandWorrallsmodel. Anotherrelevantliteratureisthedynamictheoryofpoliticaltransition.AcemogluandRobinson(2001)arguethatdemocraticrevolutionsaremorelikelywhentheeconomyisinadownturn. Inourmodel,expropriationshappenwhenoilpricesarehigh,whichcorrespondstothepositive terms-of-tradeshockforanoil-producingcountry.Thedierencecomesfromtherelativeshortandlong-termbenetsinthetwomodels.Inourmodel,thestatecomparestheimmediateproceedsofexpropriationagainstlong-termlossesineciency.InAcemogluandRobinson(2001), themedianvotertradesoimmediatedeadweightlossesduetoarevolutionandfuturegainsofa greatercontroloverpoliticaldecision-making.

Therestofthepaperisorganizedasfollows.Section2containsamodelwhichlinksstochastic
movementofoilpricestogovernmentsincentivestoexpropriate.Section3describesthedataused intheempiricalexerciseandreportstheempiricalresults.Section4concludes.

2Theory
2.1Setup
Weconsideraninniteperiodgamebetweentworisk-neutralagents:theprivate(foreign)rmF
andthegovernmentG.Eachagentmaximizesthenetpresentvalueoftheexpectedfuturecash ows.2Bothhaveadiscountfactorof_2(0;1)perperiod.

Thereisanaturalresource,e.g.oil,whichisextractedbyeitherForG,andthensoldinthe globalmarket. tbarrelsofoilinperiodtrequiresinvesting Productiontechnology.ForeitherForGextractingQ t1=Q1=_ t K unitsofcapitalinthepreviousperiod;here_2(0;1):ThecostofcapitalforFis normalizedto1:Thegovernmentislessecient.ToinstallKunitsofcapital,itneedstospend

K;where>1.Forsimplicity,weassumethatcapitalstockdepreciatesfullyinoneperiod.

Oilprice.Theglobalpriceofoil,p t,followsani.i.d. processwithadensityfunctionf(p thedistributionfunctionF(p t). TheexpectedpriceisE[p t]=Rpf(p)dp=P:Thesupportofthe

2

t)and

Thegovernmentsobjectivefunctionwouldbethesameifitmaximizedthewelfareoftherestofsociety,excluding

foreignrms,andthetaxrevenuesweredistributedtothesociety.

distributionis[p;p]:Weallowforbothboundedandunboundedsupportsp_1.Wemakethe
i.i.d.assumptionforthesakeoftractability.Moresophisticatedstochasticprocesswouldproduce similarresultsbutwouldmaketheanalysismorecomplex.

Taxationandexpropriation.Initially,theoilextractioniscarriedoutbytheprivatermF.
Aslongastheproductionisprivate,FappropriatesoutputQ;sellsitintheglobalmarketand paystaxes,T,tothegovernment.Thegovernmentsetsthetaxlevel.Thegovernmentalso canexpropriatetheoilproductionatanymoment.ExpropriationincursacostC>0forthe government.Thiscostreectsthestrengthofpropertyrightsprotectioninthecountry,sensitivity tointernationalsanctions,etc.Afteranexpropriation,theprivatermwouldneverbeinterested inreturningtothiscountry.3Formally,wefocusonperfectpublicequilibriaintherepeatedgame withthefollowingrestrictionsonbeliefs.Theprivatermbelievesthatiftheonce-expropriated rmisprivatizedback,thenthegovernmentwillexpropriateitregardlessofthestrategytheprivate ownerpursues.(Thisistantamounttoassumingthatthecostofsecondexpropriationislowerthan thecostoftherstone.)Thegovernmentbelievesthatoncetheprivatesectorfailstopaythetax, itwillnotpaytaxesinthefuture.Theseassumptionsallowfocusingonequilibriathatmaximize socialwelfare.

BeforethebeginningofthegamethegovernmentsetsthetaxscheduleT t=T(pt;Kt). Violation ofthetaxscheduleinthefutureisperceivedbythermasexpropriation.Theinitiallevelofcapital isK

1=0.

Timing.Ineachperiodt;thetimingisasfollows: _Theoilprice,p
t;isrealized.

_Iftheoilindustryispublic,thegovernmentsellsQ
t=K_ t

atpricep
tandinvestsIt=Kt+1:

_Iftheindustryisprivate,thegovernmentdecideswhethertoexpropriate. _Iftheindustryremainsprivate,theprivatesectorsellsQ
t=K_ t

atpricep
t,decideswhetherto

paythetax,andinvests.Iftheprivatesectordoesnotpaytaxes,thegovernmentexpropriates
thecompanywithoutanycostandmakestheinvestmentdecision.
3

Historically,therehavebeenexamplesofaprivatizationfollowinganationalization.Yergin(1991)tellsthestory
oftheNigeriangovernment,whichseizedtheBritishPetroleumsassetsin1973,onlytoauctionitosoonafterwards.

2.2Benchmark:therstbest
Therstbestoutcomeisasfollows:theoilbusinessisprivate,andthelevelofinvestmentisas follows
1

K_=argmax

f_K_E[p

1_

t]

Kg=(__P)

(1)

2.3Equilibriumwithoutexpropriation
Forsomeparametervalues,therstbestinvestmentlevel(1)canbesupportedalongtheequilibrium
path.Inthissection,wewillsolvefortheequilibriuminwhich(i)thegovernmenthasnoincentives toexpropriate;and(ii)thermisbetter-opayingtaxes.

Thisequilibriumissimilartotheoneintherelationalcontractsliterature(Bakeretal.,1994,
2002).Gdoesnotexpropriateastheone-periodreturnstoexpropriationarebelowthefuture payosrelatedtohigherproductioneciency.ThegovernmentbenetsfromFsmoreecient investmentasitcanchargehighertaxes.Still,thetaxeshavetobesucientlylow,sothatFs quasi-rentprovidesFwithincentivestopaythemratherthansellone-periodworthofoutputand quitthecountry.Theseself-enforcementconstraintsimposetheconditionsonparametersunder whichtherstbestissupportedinequilibrium.

Thegovernmentmaximizesitsexpectedrevenue.Sincethereisnoriskofexpropriationitis optimaltoimplementtherstbestlevelofinvestmentK
t=K_.

Letusnowchecktheself-enforcementconstraints.Atanymoment,thermshouldpreferthe
equilibriumpayo(netofinvestmentcostsandtaxes)tothedeviation(donotpaytaxesonce,do notinvestandgetzerothereafter):
1

1 1 _ p K_ __
tK__+

tE

1_

_
_=t

t[T_]_ptK__:

Thegovernmentshouldalsoprefertheequilibriumpayotoexpropriation.Ifthegovernment expropriates,itgrabsp tK__;paysthecostCandthenproduceswithsuboptimaltechnology. latterstrategybringsaboutthenetpresentvalueof 1 U

exp=

The

11_ max _PK_K = 1_

1

K_:

(2)

1_
1

Therefore,thegovernmentsself-enforcementconstraintis X
_=t

Summingtheself-enforcementconstraintsforFandG,weobtainanecessaryconditionforthis
equilibriumtoexist:

p P_

C PK__+

_(1_) 1_

foranyp2[p;p]:

Letusshowthatitisalsoasucientcondition.WheneverT t=T_=1 K_;FchoosesK_,both self-enforcementconstraintsaresatised,andthermgetszerocontinuationpayowhichmeans thatthegovernmentrevenueismaximized.IfT t<T_forsomet,thenthermsself-enforcement constraintisnotbinding,andthus,thegovernmentcanincreaseitspayobyraisingtaxes. Proposition1.Thereexistsanequilibriumwithoutexpropriationwiththerstbestlevelofinvestmentifandonlyiftheoilpricevolatilityisnottoohigh(pissucientlylowgiventheexpected priceP),institutionsarestrong(Cishigh),bothagentsaresucientlypatient(_ishigh);andthe governmentissucientlyinecient(ishigh)sothat:

_p P_ ThetaxlevelinthisequilibriumisT_=1

C PK__+

_(1_) 1_ K_.

(3)

2.4Equilibriumwithexpropriation
Iftheoilpriceisveryvolatile,(3)doesnothold.Inthiscase,theinvestmentissuboptimaland expropriationmaytakeplacealongtheequilibriumpath.LetusintroduceFsandGspayosV andV G;respectively. SincethetaxscheduleT t=T(pt;Kt)dependsonlyoncurrentoilpriceand capital,theinvestmentalongtheequilibriumpathpriortoexpropriationisalsoconstantovertime K e t= K .T h e g o v er n m e nt s p a y o i s _Z
F

as fol lo w s:

Thegovernmentdoesnotexpropriatewhenever: 1 1_Z pte K__C K;p)f(p)dp: (5) 1_ K_+T(p

t;e

K)+_

VG(e

LetPdenotethesetofoilpriceswhenthecondition(5)issatised. Thermsself-enforcementconstraintisasfollows:V K;p

F(e t)

_p K_;whereitspayoV
te

solvestheBellmanequation: Z V K;p e K_T(p K) K + _

F(e t)=pte t;e P

V K;p
F(e t+1)f(pt+1)dpt+1g:

(6)

Inequilibrium,thermsself-enforcementconstraintshouldbebinding,otherwiseGcould
increasethetaxlevelwithoutviolatingF sself-enforcementconstraint,andhenceincreaseGs payo.Therefore,thetaxis:

Z T(p
t;e P

K)=T(eK)=eT_

e K+_eK_

pf(p)dp

(7)

Sincetheoptimaltaxscheduledoesnotdependonthecurrentpricep (5)impliesthatthegovernmentdoesnotexpropriatewheneverp
t_e

t;thegovernmentsconstraint

pwhere:

ep=eK
that(5)isequivalentto:

1 1_

1_Z
1

K_+eT+_

VG(e

K;p)f(p)dp:

Letusnowsolve(4).AsshownintheLemma1intheAppendix,theequationsaboveimply e K+_PeK_+[CU _) pte K__ 1_F(ep) exp](1(8) Thegovernmentsproblemistochoosetheinvestmentlevelitwantstoimplementandtochoosethe taxlevelthatimplementstheinvestmentlevel.Toimplementagiven K,thegovernmentshould e setT(K = e e TifK t = Kandaveryhightaxotherwise.Thusthegovernmentsoptimization t) problemis: e K+_PeK__[CU F(ep)) maximizeeT+_E
t[VG(e

K;p
t+1)]

exp](1

= e

1_F(ep) 1_F(ep) K+_PeK_+[CU_)

exp](1

(9)

subjecttoepeK_= ep2[p;p]

Proposition2.If(3)doesnothold,theequilibriumisasfollows.Considerepand Kthatsolve e theoptimizationproblem(9).Whenevertheoilprice,p,exceedsep,thegovernmentexpropriates. Kwhichislowerthanthe e Aslongastheoilpriceisbelowep,thereisnoexpropriation,Finvests

rstbest,andthetaxlevelis:

Zep e T= e K+_eK_
p

pf(p)dp: K!K_. e

AsinstitutionsbecomeverystrongC!1;theinvestmentlevelapproachestherstbest Assumefurtherthatthedistributionf(_)issuchthatp2f(p)isdecreasinginpatepandp(1 p R

thestrengthofinstitutions,C,andthegovernmentsineciency;andtheequilibriumlevelof investment KincreasesinbothCand: e s 8

Proof:SeeAppendixA. Thetechnicalassumptionthatp2f(p)isdecreasinginpisnatural.Ifp2f(p)wereweakly
increasinginp,thentherewouldnotexista niteE[p]:Theassumptionthatp(1_F(p))is

increasinginpalsonatural,sincelim

p!11

_F(p)=1_:

Remark1.Inanon-genericcase,theequilibriummayinvolveunderinvestmentbutnotexpropriation.Thishappenswhenthedistributionisboundedandtherminvestssothatthegovernmentis indierentbetweenexpropriatingandkeepingthecompanyprivateexactlywhentheoilpricereaches

itsupperbound,p.Thiscaseischaracterizedbythesameoptimizationproblem(9).Empirically, however,thiscaseishardtodistinguishfromtheequilibriumwithoutexpropriation.
Weassumedthatthegovernmentsetsthetaxscheduleasafunctionofthecurrentstate

Tt=T(pt;Kt):Ingeneral,thegovernmentcouldconditionthetaxonthewholehistoryofoilprice andinvestment:T=fT
t:Ht p_HtK!R;t=1;::;1g,whereHtpandHtK

areallpossiblehistories

ofoilpriceandcapitalofdurationt.Yet,theresultswouldnotchange.Levin(2003)showedthat
stationarycontractsareoptimalamongallpossiblecontractsthatcoulddependonhistorieswhen thegameisstationaryandbothagentsareriskneutralandlackcommitment.Theargumentisas follows.First,sincebothagentsareriskneutral,wecanrestrictcontractstothosethatdependon currentstatesoftheworldandtime.Indeed,therearetwowaysofmanipulatingself-enforcement constraints:(i)currenttransfersand(ii)continuationvalues.Sinceagentsareriskneutral,i.e. theobjectivefunctionlinearlydependsoncurrentpayos,foranycontractinwhichcontinuation valuedependsonhistory,wecanndacontractinwhichthecontinuationvaluedoesnotdepend onhistory,allconstraintsaresatisedandthiscontractgivesthesameexpectedvalueforthe government.Second,sincethegameisstationary,theoptimalcontractdoesnotdependontime, andhence,itisstationary.

Thenon-trivialriskofexpropriationinequilibriummayproduceacounter-intuitiveresult:
privateownershipdoesnothavetobeoptimalexante.Indeed,ifoilpriceissucientlyvolatile

(p P ishigh)andgovernmentproductionisquiteecient(iscloseto1),thenexpropriationisa relativelyfrequentevent.Asexpropriationsincurdeadweightlosses,C,thoselossesoutweighthe
ineciencyofpublicownership.Thuswhenpropertyrightsarenotsecureitmightbeinthesocial interesttohavegovernmentownership.However,ifthegovernmentineciencyissucientlyhigh (ishigh),privateproductionissuperiortogovernmentproduction.

3Empiricalanalysis
Themodelhasanumberofempiricalimplications.First,apositiveoilpriceshockincreasestherisk
ofexpropriation.Second,weakpoliticalinstitutions(e.g.,insucientchecksontheexecutiveor weakdemocraticinstitutions)increasetheriskofexpropriation.Theconstraintsontheexecutive capturetheimmediatecostofexpropriation,whilethestrengthofdemocracyre ectsthealignment ofthecurrentgovernmentsobjectiveswiththelong-termnationalinterest.Finally,thelevel ofhumancapitaldevelopmentmayalsoaecttheriskofexpropriation.Ontheonehand,the governmentsabilitytoinvestecientlyincreasestheriskofexpropriation.Ontheotherhand, ahigherlevelofhumancapitalallowsthegovernmenttocollectmoretaxes,thuseliminating incentivestoexpropriate,renderingtheeectofhumancapitalonexpropriationambiguous.Given thathumancapitalishighlycorrelatedwithinstitutionsbothacrosscountriesandovertime,we willcontrolforhumancapitalinallspecications.

3.1Data
Expropriations.Thedataonexpropriationsarebasedonfourmajorsourcescomplemented
byourownsearchinGoogle,ProQuestandFactiva.Thefourmainsourcesuseasimilarmethodology(describedinKobrin,1980)andcoverthreedierenttimeperiods.Therstdatasetwas builtbyStephenKobrin(Kobrin,1980,1984a)andcovers1960-1979.Theseconddataset(Minor, 1994)covers1980-1992;thethirdonecomesfromCoyle(2003)andcovers1993-2002;thefourth onecomesfromKobrin(1984b)andcovers1918-1980.4OurownsearchwasalsobasedonKobrins approachandcovered1913-2006.

BelowwedescribeKobrinsmethodologyanddatasetinagreaterdetail(seeKobrin,1980,for
acomprehensivedescription).ThesedataweremostlycollectedbytheUnitedNationsEconomic andSocialCouncil.Thedataonlyincludeforceddivestmentsofforeignpropertywhichwere classiedintothefourcategories:(i)formalexpropriation,(ii)intervention,(iii)forcedsaleand (iv)contractrenegotiation.Unlikeformalexpropriation(whichtookplaceinaccordancewiththe locallaw),interventionisanextra-legalforcedtransferofownership(byeitherpublicorprivate actors).Contractrenegotiationisarevisionofcontractualagreementsinvolvingcoercivepowerof thegovernment,whichresultedinaneectivetransferofownership.

Weonlyconsidertheactsofexpropriationinoilextraction(SICcodes130and131).Our
4 Thelastdatasetincludesnationalizationsinoilproductiononly.

10

dependentvariableisasfollows: 8 > < 1;iftherewasatleast1expropriationincountryiinyeartintheoilsector; E

it=

(10)

> : 0;otherwise. Westudytheperiodof1960-2002;accordingtothedatasourcesabove,duringthisperiod

therehavebeen94expropriationsin40countries(seetheAppendixBforthecompletelist).Most nationalizationswereconcentratedin1970s(seeFigure1).

Oilprice.WeusecrudeoilpricedatafromBPStatisticalReviewofWorldEnergyJune 2006(www.bp.com).Figure2presentsthelistofallthemajoreventsthataectedoilpricesin 1970-2000accordingtoUSDepartmentofEnergysEnergyInformationAdministration.5 Theorypredictsthatboththeexpectedoilpriceandtheoilpriceshock(deviationfromthe

trend)aecttheprobabilityofexpropriation.Astheoilpriceisnotstationary,includingthe theoilpriceperseinregressionscouldgeneratespuriousresults.Thus,weneedtosingleout theunexpectedcomponentintheoilpricedynamics.WeuseamodelfromPindyck(1999)who estimatesthefollowingequationforthelong-termoilprices(weextendhisdatasetto1882-2006):

ln(pt)=0:844___ln(pt1)+3:40___+0:0280__t+0:000259___t2+"t; wherep t istheoilpricein2005USdollars,t=year1982;___,__,_denote1%,5%and10% statisticalsignicance,respectively.

(11)

Thisequationallowsustoobtaintheunexpectedoilpricecomponent" t whichweuseasan independentvariablethroughoutthepaper.Werefertothisresidualastheoilpriceshock. Resourceabundance.Wealsocontrolforoilabundance.Themoreoilinthecountry,the

lowerthecostofexpropriationCperunitofexpropriatedassets;henceweshouldobservemore expropriationsinoil-richercountries.

Oilabundanceisusuallyproxiedbyoilreserves,oilproduction,oroilexports.Wewilluse
thedataonoilproductionfromtheU.S.EnergyInformationAdministrationratherthandata onoilreserves.Systematicdataonoilreserves(fromBP)onlystartin1980,whilethebulkof expropriationsoccurredin1970s.Theotherproblemwithusingdataonreservesisthatthisdata usuallyincludeeconomicallyrelevantreserves,whichareendogenoustothecurrentoilprice.
5

Seehttp://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/chronology/petroleumchronology2000.htm)

foradetaileddescriptionofevents.

11

Figure2:Majoreventsaectingtheinternationaloilpricechanges.Source:PetroleumChronology ofEvents1970-2000.USDepartmentofEnergy,EnergyInformationAdministration.

Wealsopreferoilproductiontooilexportsasthelatterareendogenoustothelevelofdevelopment.Mostdevelopedeconomiesarediversied.Eveniftheyhavesubstantialoilreservesand oiloutput,theystillneedtoimporttocovertheneedsofmanufacturingandservicesectors.For example,theU.S.isoneofthelargestoilproducers,butitimportsratherthanexportsoil. Weproxyoilwealthbythelogarithmofaverageannualcrudeoilproductionin1980-2002plus onethousandbarrels.Toaccountforpercapitaoilwealth,wesimplycontrolforthelogarithmof countryspopulationinallspecications.

Institutionsandthecostofexpropriation.Weproxythecostsofexpropriationbythe
qualityofpoliticalinstitutionsusingtwovariablesfromthePolityIVdataset(MarshallandJaggers,

2006):constraintsontheexecutive(XCONST)andinstitutionalizeddemocracy(DEMOC). XCONSTrangesfrom1to7andcapturestheexistenceofdecisionrulesintheeconomy(thechecks 12

andbalancesontheexecutive).DEMOCrangesfrom0to10andincludesboththeconstraints
ontheexecutive,thepresenceofinstitutionsandproceduresthroughwhichcitizenscanexpress eectivepreferencesaboutpoliciesandleaders,andguarantiesofcivilliberties. Thetwovariablesarerelatedbutdomeasuresomewhatdierentaspectsofinstitutions.The XCONSTvariablecapturesthestrengthofinstitutionsunderstoodasrulesofthegame.Itisoften usedasthemainproxyforinstitutions(seeHenisz,2000,andadiscussioninGlaeseretal.,2004). TheDEMOCvariablealsoincludestheimplicitincentivesfortheexecutivetocareforsocialwelfare throughprovidingcitizenswithproceduresforremovingnon-performingexecutives. Whilethereexistmanyotherdatasourcesonthequalityofinstitutions,onlyPolityIVprovides

annualdataforthewholeperiodwestudy.Allotherindices(includingthosefromtheFreedom House)donotcover1970swhenmostoftheoilexpropriationshavetakenplace. Humancapital.Weproxyhumancapitalbyadultliteracy(percentageofliteratecitizens

amongthoseof15yearsorolder).TheadultliteracydatacomefromtheCross-NationalTimeSeriesDataArchive(DatabanksInternationalatwww.databanks.sitehosting.net)thatprovidesannualestimatesuntil1980.From1980onthereisonlyoneobservationevery veyears.Assuch, weinterpolatethemissingdataforthisvariable.

Wehavealsousedalternativemeasuresofhumancapital(suchasyearsofschooling,share ofpopulationwithprimary,secondary,tertiaryeducation)andresultsweresimilar.Wefocuson literacyasitcapturesthelevelofhumancapitalratherthanthehumancapitalinvestments. GDPpercapita.TherealGDPpercapitadatacomefromtheWorldDevelopmentIndicators2004.Unfortunately,therearemanygapsinthesedatapriorto1980inlessdeveloped

countries,whereandwhenmostexpropriationstookplace.ThisiswhywewillestimatespecicationsbothwithandwithoutpercapitaGDP(thelattertoincreasethesamplesize). Countrycoverage.WehaveexcludedthecountriesoftheformerSovietUnion,Yugoslavia,
Czechoslovakia,Germany,Namibia,andEritrea.First,itishardtoreconcilenationalandsubnationalstatisticsforthesecountriesthathaveundergonebreakupandunicationeventsduringour sampleperiod.Second,astherewasnoprivatepropertyinthecentrallyplannedeconomies,by denitionexpropriationwasnotpossible.Wehavealsoremoved17countriesforwhichthereare nodataonoilproductionorpopulation.Weendedupwith149countries.

13

3.2Empiricalmethodology
Weusethedataabovetostudythedeterminantsoftheriskofexpropriation.Ourtheoryimplies
thatexpropriationismorelikelywhenoilpricesarehighandwhenthequalityofinstitutionsis low.Ourmodelhasambiguousimplicationsfortheeectofhumancapital.

Weestimatelogitregressionswherethebinarydependentvariable,E

it,iszerowhenthereis

noexpropriationandonewhenthereisexpropriation,foreachincountryiinyeart.Weuse
threespecications.First,weestimateabetween-eectsspecicationtocomparethecountries withfrequentandrareoccurrencesofexpropriation.Thisspecicationaimsatunderstanding country-specicfactorsthatdriveexpropriationrisks.Itis,however,vulnerabletoomittedvariable bias,misspecication,andothermethodologicalproblems.Also,bytreatingeachcountryasone observationwecannottakeadvantageoftheacross-timevariationinourindependentvariables.In particular,wecannotestimatetheeectofoilprices.

Thisiswhywealsorunpooledregressions(controllingforclusteringatthecountrylevel)
andconditionalxed-eectsregressions.Pooledregressionstreateachcountry-yearasaseparate observation;inparticular,weusedataoninstitutionsandeconomicdevelopmentinagivencountry foragivenyear:

whereInst
i t

P(E it=1)=F(_OilPriceShockt+_Instit+Xit); isaproxyforinstitutions(democracyorconstraintsontheexecutive),X

it

isavec-

torofcontrols(humancapital,oilabundance,regiondummies,logarithmofGDP,logarithmof
population),andF(:)isthecumulativedistributionfunctionoflogisticdistribution. Thexedeectspecicationincludescountrydummiesandthereforetakesintoaccountall country-specicfactorsthatdonotvarywithtimesuchaslegalorigin,coloniallegacies,religion, culture,etc.Thexedeectspecicationis:

P(E
it=1)=F(~

_OilPriceShock
t+~ it+~

_Inst ~X
it+_ i)

where_
idenotescountryxedeects,and itisavectorofcontrolsthatvariesintime(suchas

~X

logarithmofGDPpercapita). Thexedeectmodelisastrongtestoftheeectofinstitutions.Bydenition,institutions
evolveslowly.Thecoecient~_capturestheeectofthechangeininstitutionsonthechangein theriskofexpropriationcontrollingforallcountry-specicvariables.Thisspecicationcanonly beestimatedonthecountrieswithatleastoneexpropriation,whichfurtherreducesthesample andmakesthetestevenmorechallenging.

14

3.3Results
Summarystatisticsandbetween-eectsspecications Table1presentsthesummarystatistics.Weshowtheaverageoilpriceshockfortheyearswith andwithoutexpropriations.Wealsocomparetheaveragequalityofinstitutions,andaveragelevel ofhumancapitalforcountrieswithandwithoutexpropriationsandforcountry-yearswithand withoutexpropriations.Allthesummarystatisticsareconsistentwithourmodel:expropriations aremorelikelytohappenwhenoilpriceshockishigh,andincountriesandcountry-yearswith weakerinstitutions.Thelattereectholdsforthewholedatasetandforthesubsampleofcountries withatleastoneexpropriation.Table1alsoshowsthatexpropriationsaremorelikelyincountries andcountry-yearswithlowerhumancapital. Table1.Summarystatisticsforexpropriationsandnon-expropriations.
ExpropriationNoexpropriationt-statisticObservations Expropriations,
outoftotal

Oilpriceshock Executiveconstraints Executiveconstraints Executiveconstraints Democracy Democracy Democracy Literacy Literacy Literacy

0.062-0.086-1.817*Years22/43 2.4953.9625.83***Country-years91/5064 2.4953.1832.952***Country-years? 3.0834.2473.177***Countries39/131 1.3413.9535.838***Country-years91/5064 1.3412.4893.097***Country-years? 2.3064.4623.223**Countries39/131 42.28864.5067.142***Country-years92/5121 42.28856.0085.121***Country-years? 54.29167.6382.679***Countries39/139 92/1431 91/1491 91/1491

? countrieswithatleastoneexpropriation

*signicantat10%;**signicantat5%;***signicantat1%

Thecorrelationbetweeninstitutionsandtheriskofexpropriationdisappearsinbetween-eects regressionsoncewecontrolforothercountry-levelvariables(seeTableB2intheAppendix).In ordertostudythewithin-countrydynamicsandtocontrolfortheoilpriceshock,weestimate pooledandxed-eectsregressionsbelow.

15

Pooledregressions Table2presentstheresultsofpooledregressions(controllingforclusteringatthecountrylevel). Expropriationismorelikelyinyearswhenoilpriceshockishighandincountry-yearswithpoorer institutionsandlowerhumancapital.Theseresultsholdwhenwecontrolforappointmentsofnew rulers,oilabundance,regionaldummies,GDPpercapitaandGDPgrowth. Table2:Logitpooledregressions.

Dependentvariableisadummyforexpropriation Oilpriceshock
1.791.801.791.791.811.82 [0.27]***[0.27]***[0.27]***[0.28]***[0.34]***[0.34]***

Executiveconstraints

-0.17-0.07-0.18 [0.07]**[0.09][0.09]**

Democracy

-0.15-0.08-0.12 [0.04]***[0.04]*[0.05]**

Literacy

-0.04-0.04-0.03-0.03 [0.01]***[0.01]***[0.01]**[0.01]**

Changeofruler

0.740.780.620.650.530.55 [0.28]***[0.28]***[0.30]**[0.30]**[0.31]*[0.31]*

Averagelogoilproduction

0.490.50.510.520.700.70 [0.07]***[0.07]***[0.08]***[0.08]***[0.14]***[0.14]***

LogGDPpercapitain1965

0.70.63 [0.29]**[0.29]**

LogGDPpercapita

-1.04-0.95 [0.42]**[0.40]**

Logofpopulation

-0.37-0.36-0.43-0.43-0.54-0.53 [0.10]***[0.10]***[0.11]***[0.11]***[0.20]***[0.20]***

Observations

506050604669466935363536

Allspecicationsincluderegionaldummies.Robuststandarderrorsareinbrackets. *signicantat10%;**signicantat5%;***signicantat1%

Thecoecientsatthecovariatesarealsointuitive.Changeofrulerandoilabundanceare positivelycorrelatedwithexpropriation.GDPgrowthisnegativelycorrelatedwithexpropriation, whiletheinitiallevelofGDPpercapitaispositivelycorrelatedwithexpropriation.Aswecontrol forinstitutions,thelatterresultislikelytoreectthelevelofexpropriablewealth(similarlytooil 16

abundance,whichweproxyonlyimperfectly). Table3showsthattheresultsarethesameforthesubsampleofcountrieswhichhadatleastone
expropriation.Thissubsampleisimportantforanumberofreasons.First,itisexactlythissubset forwhichpooledandpanelregressionscanbecompared.Second,forthissubsetweknowthat probabilityofexpropriationisnottrivial(andthecountryisintheequilibriumwithexpropriation).

Asanadditionalrobustnesscheck,wehavealsoestimatedthesamespecicationsforthesubsample oflessdevelopedcountries.Theresults(availableuponrequest)aresimilar.
Table3:Logitpooledregressionsforcountrieswithatleastoneexpropriation. Dependentvariableisadummyforexpropriation Oilpriceshock
1.901.901.911.911.861.85 [0.30]***[0.30]***[0.31]***[0.31]***[0.39]***[0.38]***

Executiveconstraints

-0.16-0.08-0.21 [0.07]**[0.08][0.06]***

Democracy

-0.14-0.08-0.16 [0.04]***[0.04]*[0.03]***

Percentliterate

-0.04-0.04-0.06-0.06 [0.01]***[0.01]***[0.01]***[0.02]***

Changeofruler

0.70.720.580.580.510.52 [0.30]**[0.30]**[0.32]*[0.32]*[0.32][0.32]

Averagelogoilproduction

0.230.250.220.230.320.33 [0.05]***[0.05]***[0.06]***[0.06]***[0.10]***[0.10]***

LogGDPpercapitain1965

0.790.71 [0.31]**[0.32]**

LogGDPpercapita

-0.45-0.27 [0.39][0.38]

Logpopulation Observations

-0.25-0.25-0.3-0.290.080.14 [0.08]***[0.08]***[0.10]***[0.10]***[0.21][0.23] 1491149113911391968968

Allspecicationsincluderegionaldummies.Robuststandarderrorsareinbrackets. *signicantat10%;**signicantat5%;***signicantat1%

17

Fixedeects TheresultsofxedeectestimationsarepresentedinTable5.Theresultsareconsistentwiththe model.Expropriationsaremorelikelytooccurwhentheoilpriceshockishigh.Evencontrolling forcountryxedeects,higherqualityofinstitutions(andofhumancapital)reducestheriskof expropriation.Achangeinastatesrulerincreasestheriskofexpropriationinsomespecications. Table4:Logitpanelregressionswithcountryxedeects.

Dependentvariableisadummyforexpropriation Oilpriceshock
1.921.921.891.881.911.901.982.14 [0.29]***[0.29]***[0.31]***[0.31]***[0.36]***[0.36]***[0.31]***[0.32]***

Executiveconstraints

-0.25-0.22-0.17-0.16-0.11 [0.09]***[0.10]**[0.10][0.07]**[0.06]*

Democracy

-0.23-0.16-0.15 [0.08]***[0.08]**[0.08]**

Percentliterate

-0.10-0.10-0.12-0.12-0.13-0.13 [0.02]***[0.01]***[0.02]***[0.02]***[0.02]***[0.01]***

Changeofruler

0.660.670.40.40.560.56-0.15-0.18 [0.31]**[0.31]**[0.32][0.32][0.36][0.37][0.29][0.26]

LogGDPpercapita

1.121.141.120.74 [0.73][0.73][0.53]**[0.46]

Observations NumberofCountries

14811481138313831057105711021102 3838383828283030

Robuststandarderrorsareinbrackets.

*signicantat10%;**signicantat5%;***signicantat1%

Inthelasttwospecicationswechecktherobustnessofourresultsbyreplacingthedependent variableexpropriationoccurredincountryiinyeartwithexpropriationoccurredincountryi inyeart;t1;ort+1andwithexpropriationoccurredincountryiinyearst2tot+2. Theresultsaresimilar.

3.4Alternativeexplanations
Theresultsaboveimplythatevencontrollingfortime-invariantcountrycharacteristicshigheroil pricesandpoorerinstitutionsincreasetheriskofexpropriation.Thefactthatthemagnitudesof 18

theeectsaresimilarinpooledandxedeectsregressionssuggeststhattheeectofinstitutionsis
similaracrossallthecountriesthathaveexpropriatedforeignoilcompanies.Thereis,however,an issueofreversecausality.Itmightwellbethecasethatexpropriationsconcentratesomuchpower inthehandsoftherulersthatinstitutionsareundermined.Theremayalsobeameasurementbias issue.Evenifexpropriationsdonotinuencetheinstitutionsperse,theymayaecttheoutsiders perceptionofinstitutionsandlowerthePolityIVXCONSTandDEMOCscores.Bothissuesare hardtoresolvewiththedatawehave.Wecannotdistinguishbetweendirectandreversecausality bystudyingthesequencingofevents.Indeed,ifexpropriationsareplannedordiscussedayearor twoinadvance,themeasuresofinstitutionsmaygodownbeforetheactualexpropriation.Still, webelievethatthereversecausalityisunlikelytobethecase.WeusetheXCONSTandDEMOC variables,whicharebasedonpoliticalproceduresthataremeasuredinaratherobjectivefashion andarenotlikelytochangedramaticallywithinayearortwo(MarshallandJaggers,2006).Also, theanecdotalevidenceinYergin(1991)andKobrin(1980,1984)suggeststhatthecausalitydoes notgofromexpropriationtoinstitutions.

Thereisapossibilitythattherelationshipbetweenexpropriationsandoilpricecanbespurious.
Thereareseveralreasonswhyitmaybethecase.First,thesharpincreaseinoilpricesand expropriationsinthe1970scouldbedrivenbythesamepoliticalevents theYomKippurWar andtheWestssupportforIsraelthatwasfollowedbyanembargointroducedbytheMiddle-Eastern oilproducingcountries.Theoilembargoresultedinasharpincreaseinthepriceofoilandwas supplementedbyexpropriationsofforeigncompaniesthatbelongedtocountriesthatsupported Israel.ThisargumentdoesnotimplythatArabcountrieshadtoexpropriatetoraiseprices; thesameoutcomecouldbeachievedthroughincreasingtaxes.Yet,toruleoutthisalternative explanation,were-estimatedalltheregressionswithoutyears1972-74;alltheresultsremained similar.Asanadditionalrobustnesscheckoftheendogeneityofthepriceofoiltoexpropriations weconductedasimpleGrangercausalitytest.ItturnsoutthatexpropriationsdonotGranger- causeexpropriations:

OilPriceShoc k
t =

0:054+0:071_OilPriceShock

t1+0:090_1fP i

it1>0g+_

t:

(thecoecientsatbothlaggedoilpriceshockandlaggedexpropriationsarenotsignicant).
Anotherissueisthatexpropriationsin1970sweredrivenbyasignicantincreaseinthemanagerialandtechnicalcapabilitiesofoil-producingcountries(seeKobrin,1984).Ifanincreasein countriescapabilitiescoincideswiththeincreaseinoilprices,therelationshipbetweenthelikeli-

hoodofoil-producingcompaniesexpropriationsandoilpriceshocksmightbespurious.Weare tryingtocontrolforthisexplanationboththroughincludinghumancapitalandGDPpercapita; 19

ourresultsinpooledandxedeectsregressionsarerobusttoaddingthesecontrols.
Yetanotheralternativeexplanationisbasedonthestatecapturetheory.Asoilpricesrise, theprivateownersofoilcompanieshavehigherrents,whichincreasestheirweightinthepolitical process.Thus,expropriationmightbecausedbythedesiretocurbthisinuence(seeadiscussion inRajanandZingales,2003).Again,thisargumentisnotconsistentoncewetakeintoaccountthe possibilityofraisingtaxes.Ifthegovernmentisstrongenoughtoexpropriatetheprivateowners oftheoilcompanies,itshouldalsobecapableoftaxingtheirrentswithoutafullexpropriation. Astheglobaloilpriceisobservableandveriable,taxingtheoilrevenuesiscertainlytechnically feasible.

4Conclusions
Recentexpropriationsofforeign-ownedoilassetsinVenezuela,Bolivia,Russia,andKazakhstan
havegeneratedrenewedinterestinthepoliticaleconomicsofexpropriations.Unliketheprevious studiesofexpropriationsinthe1970s,wenowhavemuchbetterpaneldataonsocio-economicindicatorsandpoliticalinstitutionsandcanstudythedeterminantsofexpropriationwhilecontrolling forcountryxedeects.Thedataallowustotesttheconventionalwisdomthatexpropriationsare morelikelytohappenintheperiodsofhigheroilpricesandincountrieswithpoorerinstitutions. Webackthisideabyconsideringadynamicmodelwithlimitedcommitmentonbehalfofboth governmentandtheforeignoilcompany.Inthismodelexpropriationsemergeinequilibriumwhen oilpricesarehighandpoliticalinstitutionsareweak.Wethentakethemodeltothedataandshow thatexpropriationsindeedoccurwhenoilpricesarehigh,whenpoliticalinstitutionsareweakand whenhumancapitalislow.Theseresultsholdevenifwecontrolforcountry xedeects.

20

References
Acemoglu,Daron,andJamesRobinson.2001.ATheoryofPoliticalTransitions,American
EconomicReview91:938-963.

Baker,George,RobertGibbons,andKevinJ.Murphy.1994.SubjectivePerformanceMeasures inOptimalIncentiveContracts.QuarterlyJournalofEconomics109:1125-56. Baker,George,RobertGibbons,andKevinJ.Murphy.2002.RelationalContractsandtheTheory

oftheFirm.QuarterlyJournalofEconomics117:39-84.

Bohn,Henning,andRobertT.Deacon.2000.OwnershipRisk,Investment,andtheUseofNatural
Resourses,TheAmericanEconomicReview90(3):526-549.

Coyle,Thomas.2003.NotDeadYet:anUpdateofExpropriations1993-2002,mimeo. Glaeser,EdwardL.,RafaelLaPorta,FlorencioLopez-de-Silanes,andAndreiShleifer.2004.Do
InstitutionsCauseGrowth?JournalofEconomicGrowth9(3):271-303.

Henisz,WitoldJerzy.2000.TheInstitutionalEnvironmentforEconomicGrowth,Economicsand
Politics12(1):1-31.

Kobrin,StephenJ.1980.ForeignEnterpriseandForcedDivestmentinLDCs,International
Organization34(1):65-88.

Kobrin,StephenJ.1984.ExpropriationsasanAttempttoControlForeignFirmsinLDCs:Trends
from1960to1979,InternationalStudiesQuarterly28(3):329-348.

Kobrin,StephenJ.1984.TheNationalizationofOilProduction:1919-1980.InD.Pearceetal.
(eds.)RiskandthePoliticalEconomyofResourceDevelopment.NewYork:St.Martin sPress: 137-164.

Kobrin,StephenJ.1985.DiusionasanExplanationofOilNationalization:OrtheDomino
EectRidesAgain,TheJournalofConictResolution29(1):3-32.

21

Levin,Jonathan.2003.RelationalIncentiveContracts.AmericanEconomicReview93(3): 835-857. Marshall,M.,andK.Jaggers,2006.PoliticalRegimeCharacteristicsandTransitions,1800-2004 DatasetUsersManual.PolityIVProject,(UniversityofMaryland,CollegePark,MD). Megginson,WilliamL.2005.TheFinancialEconomicsofPrivatization.NewYork:Oxford

UniversityPress.

Minor,MichaelS.1994.TheDemiseofExpropriationasanInstrumentofLDCPolicy,1980-1992.
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Moran,TheodoreH.1973.TransnationalStrategiesofProtectionandDefensebyMultinational
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NewYorkTimes(2007)KazakhsSuspendPermitsforOilField.August28,2007 Pindyck,RobertS.1999.TheLong-RunEvolutionofEnergyPrices,EnergyJournal20(2):1-27.

Rajan,Raghuram,andLuigiZingales.2003.SavingCapitalismfromCapitalists.Princeton:
PrincetonUniversityPress.

Thomas,Jonathan,andTimWorrall.1994.ForeignDirectInvestmentandtheRiskofExpropriation,TheReviewofEconomicStudies,61(1):81-108.

Williams,M.L.1975.TheExtentandSignicanceoftheNationalizationofForeign-OwnedAssets inDevelopingCountries,1956-1972,OxfordEconomicPapers,NewSeries27(2):260-273.
Yergin,Daniel.1991.ThePrize.NewYork:SimonandSchuster.

22

AppendixA:Proofs.
Lemma1.TheBellmanequations(4)and(7)imply(8). Proof.Weshallrstsimplify(5).LetuscalculateV expropriates,itspayoequalsV K;p C+U
G(e t)= G(e exp+pte

K;p t). K_.Whenp

t<e

Whenpt_epthegovernment pthegovernmentdoes

notexpropriate,andV G(e V K;p t+i)intoit,wherei=1;::;1:

G(e

K;pt)canbecomputedusingformula(4)anditerativelysubstituting e T+_(1F(ep))[C+U K_
exp]+_e eppf(p)dp

R_

V K;p
G(e t)=

1_F(ep) R_ F(ep))+eK_
eppf(p)dp

Nowitiseasytondtheexpectedgovernmentpayo: e TF(ep)+[C+U E K ; p
t[VG(e t+1)]= exp](1

Thus,thecondition(5)canberewrittenas:

1_F(ep)

e K+_PeK_+[CU p K__
te exp](1

_) :

1_F(ep)

ProofofProposition2: Proof.(i)First,weprovethat e K<K_: e Assumethat K_K_,thentheconstraintintheoptimizationproblem(9)implies: ep(1_F(ep))eK_= e _): K+_PeK_+[CU

exp](1

Letusnowprovethatbydecreasing KwecanachieveahighervalueofepeK_.Indeed,the right-handsidedoesnotdecrease,since K_K_andepincreases.6Hence: e h i h i d ep(1_F(ep))eK_ =_f(ep)epeK_dep+(1_F(ep))d epeK__0; e i.e.epeK_infactincreases.Thus K_K_cannotbethecase. e (ii)Letusnowprovethat K!K_asC!1 Firstofall,if_p<1,thenwhenCisbigenough,condition(3)holds;hence Let_p=1:Sincethegovernmentnationalizesonlyifitisbetterthangettingtaxes,
e

K=K_:

t[V
6

t)]G(e> 1_

1_

.Ontheotherhand,thisequilibriumisalwaysworse
~ Kwasthesolutionoftheoptimizationproblem(9).

I f ~ p d e c r e a s e d i t w o u l d c o n t r a d i c t t h e a s s u m p t i o n t h a t Indeed,ifweincreased

K,then

~ pwouldincrease,andhence,

p~K_wouldalsoincrease. ~

23

thantherstbest,henceE
t[VG(e

K;p
t)]<

K_+_PK__ 1_

.Fromtheequation(8)for~pitfollowsthat
K_+_PK__ t[V G(K_;pt)]

ep!1asC!1;ifthegovernmentset

e K=K_thenE

1_

.Ifthe

governmentsetseK6=K_;thenexpectedgovernmentpayowouldconvergetoalevelstrictlybelow
therstbestlevel.Thiscompletestheproof.

(iii) KandepincreaseinbothCand. e Considertheoptimizationproblem(9).Denotey=

e K_andx=[CU

exp](1

_):Wewill

studythecomparativestaticswithregardtoxandshowthatanincreaseinxresultsinhighery andep: Letusrewritetheoptimizationproblem: maxepy subjectto TheLagrangian:maxepy+_x x _P+ep[1_F(ep)]+y1=_ y= ep_x _1

y1=_

(12)

_ep[1_F(ep)]_y1=_ y+__P1 impliestherst-orderconditions _ 2 =0; y2 _

y_[1_F(ep)]+__epf(ep)=0: Onecaneasilycheckthatthesecond-orderconditionsaresatised.Solvingfor_;wend ep[1_F(ep)]_ep2f(ep)=x y+ 1_ y1=_ _ 1 Substitutingep[1_F(ep)]+y1=_

1 x y =_Pfromtheconstraint,weobtain _P=_ep2f(ep)+1 _y 1=_1

Asweassumedthatep2f(ep)decreasesinep;thisequationdeterminesanincreasingrelationship
betweenyandep:

Therefore,ifxincreasestheneitherbothyandepincreaseorbothdecrease.Thelattercannot
bethecaseasitcontradictstheconstraint(12).

24

AppendixB:Tables.
TableB1:Listofexpropriations,19602002. YearCountryYearCountryYearCountryYearCountry
1971AbuDhabi?1959Cuba1972Iraq1976Nigeria

1972AbuDhabi?1975Dubai?

1972Iraq1979Nigeria

1973AbuDhabi?1969Ecuador1973Iraq1972Oman
1974AbuDhabi?1972Ecuador1975Iraq1974Pakistan 1962Algeria1973Ecuador1977Iraq1968Peru 1967Algeria1974Ecuador1972Kuwait1985Peru 1970Algeria1976Ecuador1972Kuwait1973Philippine 1971Algeria1977Ecuador1973Kuwait1972Qatar 1974Algeria1979Ecuador1974Kuwait1974Qatar 1976Algeria1961Egypt1975Kuwait1976Qatar 1976Angola1962Egypt1977Kuwait1977Qatar 1977Angola1964Egypt1969Libya1972SaudiArabia 1978Angola1975Ethiopia1970Libya1974SaudiArabia 1963Argentina1973Gabon1971Libya1975SaudiArabia 1974Bahrain1976Gabon1972Libya1976Sudan 1977Bahrain1974Ghana1973Libya1969TrinidadandTobago 1979Bahrain1976Guyana1974Libya1974TrinidadandTobago 1975Bangladesh1975India1973Malaysia1979TrinidadandTobago 1969Bolivia1981India1975Morocco1981TrinidadandTobago 1962Burma1960Indonesia1976Mozambique1970Uganda 1968Cambodia1965Indonesia1973Nepal1974UnitedArabEmirates 1972Colombia1973Iran1971Nigeria1971Venezuela 1974CongoPR1979Iran1973Nigeria1975Venezuela 1975CongoPR1961Iraq1974Nigeria1969Yemen 1980Zambia

? AbuDhabiandDubaiareemiratesoftheUnitedArabEmirates

25

TableB2:Orderedlogitbetween-eectsregressions.
Numberofexpropriationsinacountry,19602002 Executiveconstraints
-0.17-0.48-0.22 [0.20][0.16]***[0.17]

Democracy

-0.13-0.28-0.15 [0.12][0.09]***[0.09]

Percentliterate

-0.03-0.03-0.05-0.04-0.04 [0.03][0.03][0.01]***[0.01]***[0.01]***

LogGDPpercapitain1965

-0.13-0.11-0.13 [0.47][0.47][0.47]

Averagelogoilproduction

0.650.650.580.590.680.690.66 [0.18]***[0.18]***[0.10]***[0.10]***[0.11]***[0.11]***[0.10]***

Logarithmofpopulation

-0.45-0.44-0.25-0.27-0.36-0.34-0.31 [0.35][0.35][0.20][0.20][0.17]**[0.19]*[0.20]*

NumberofCountries

9393131131139129130

Robuststandarderrorsareinbrackets.Regionaldummiesarecontrolledfor,butnotreported. *signicantat10%;**signicantat5%;***signicantat1%

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