Profit Sharing under the Threat of Nationalization

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 of rents with option values.


Issue Date:
2010
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/58292
Total Pages:
23
JEL Codes:
C7; D8; K3; F2; O1
Series Statement:
Working Paper
2010: 1




 Record created 2017-04-01, last modified 2017-08-25

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