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The Natural Resources TrapPrivate Investment without Public Commitment$
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William Hogan and Federico Sturzenegger

Print publication date: 2010

Print ISBN-13: 9780262013796

Published to MIT Press Scholarship Online: August 2013

DOI: 10.7551/mitpress/9780262013796.001.0001

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Petroleum Contracts: What Does Contract Theory Tell Us?

Petroleum Contracts: What Does Contract Theory Tell Us?

(p.47) 2 Petroleum Contracts: What Does Contract Theory Tell Us?
The Natural Resources Trap

Philippe Aghion

Lucía Quesada

The MIT Press

This chapter provides a brief description of the main characteristics of contracts between oil companies and local governments, and then draws from existing contract theory to rationalize these contractual forms, to assess their strengths and weaknesses, and to explain their recent evolution. In particular, the main concern here is understanding the reasons behind the justification of governments in reneging on past agreements and why contracts have evolved toward more flexible sharing rules. It is argued here that the recent model of “contracts as a reference point” proposed by Hart and Moore, which adapted to the situation where the initial contract is negotiated by a government with specific interests, is best suited for that purpose. The chapter starts by showing that existing contracts between countries and oil companies are mainly distinguished by the allocation of ownership of the oil and gas to be extracted.

Keywords:   contracts, oil companies, local governments, contract theory, sharing rules, contracts as a reference point, Hart, Moore, allocation of ownership

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