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Research article2013Peer reviewedOpen access

Profit sharing under the threat of nationalization

Di Corato, Luca


A multinational corporation engages in foreign direct investment for the extraction of a natural resource in a developing country. The corporation bears the initial investment and earns as a return a share of the profits. The host country provides access and guarantees conditions of operation. Since the investment is totally sunk, the corporation must account in its plan not only for uncertainty in market conditions but also for the threat of nationalization. In a real options framework, where the government holds an American call option on nationalization, we show under which conditions a Nash bargaining leads to a profit distribution maximizing the joint venture surplus. We find that the threat of nationalization does not affect the investment threshold but only the Nash bargaining solution set. Finally, we show that the optimal sharing rule results from the way the two parties may differently trade off rents with option values. (C) 2013 Elsevier B.V. All rights reserved.


Real options; Nash bargaining; Expropriation; Natural resources; Foreign direct investment

Published in

Resource and Energy Economics
2013, Volume: 35, number: 3, pages: 295-315

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