Speaker: Gerhard Toews (New Economic School / University of Stavanger)

Title: The Geoeconomics of Contract Enforcement: Coercion and Backloading

Abstract: Imperfect contract enforcement is pervasive. This is particularly salient in countries with weak institutions, especially if the contracts involve the government, since it can manipulate the law to abuse its power vis-a-vis private investors. This paper uses the  formal contract enforcement in Thomas & Worrall (1994, ReStud) to predict that, with weaker formal enforcement, agreements are more backloaded and share more rents with the government. To test this, rich data are employed on the universe of multinational oil & gas companies worldwide for 1960-2019. Exploiting the global reduction of military contract enforcement and associated increase in the threat of expropriation in the late 60s, the analysis shows that companies responded by: backloading the contracts as much as 3 years, increasing the share of the rents to the government by 20ppts. A back of the envelope calculation suggests that a 3 year delay in production results in an average loss of more than 1billion US$ in rents per country and year.  As a result, governments have a 13.5% revenue loss but their rent shares increase by 20ppts – governments are even better off financially.  We use the placement of US military deployments in the Middle East following the Iranian Revolution in 1979 to show that contract backloading and government rents diminish with the increased ability to enforce.