Di Corato, Luca
- Department of Economics, Swedish University of Agricultural Sciences
Abstract
A government bargains a mutually convenient agreement with a foreign firm to extract a natural resource. The firm bears the initial investment in field research and infrastructures and earns as a return a share on the profits. The firm must cope with uncertainty due to market conditions and, as initial investment is totally sunk, also due to the risk of successive expropriation. In a real options framework where the government holds an American call option on expropriation I show under which conditions Nash bargaining is feasible and leads to attain a cooperative agreement maximizing the joint venture surplus keeping into account both the sources of uncertainty on profit realiza- tions. I show that the investment trigger does not change under the threat of expropriation, while the set of feasible bargaining outcomes is restricted and the distributive parameter is adjusted to account for the additional risk of expropriation
Keywords
Real Options; Nash Bargaining; Expropriation; Natural Resources; Foreign Direct Investment
Conference
Jornadas de Economía Industrial (XXIII edition)
SLU Authors
UKÄ Subject classification
Social Sciences
Economics and Business
Permanent link to this page (URI)
https://res.slu.se/id/publ/23135