NES professor Marta Troya Martinez presented a paper “Weak Institutions and Relational Taxation in the Oil & Gas Industry” (co-authored with NES professor Gerhard Toews and University of St Andrews professor Radoslaw Stefanski) at the 5th Workshop on Relational Contracts. It was hosted by the Economics Department of Universidad Carlos III in Madrid on June 24 – 25.
“In the paper, we shed light on whether weak institutions undermine the government's credibility when contracting with oil and gas firms, so any agreement needs to be self-enforced instead. If agreements are self-enforcing, elections are a shock that decreases government credibility”, said Marta.
Using worldwide contract data from the largest 24 companies, researches find that governments in countries with weak institutions increase their taxes by 8 percentage points on the year of election. This increase is more prominent when there is a successful oil company from this country and is mostly paid by late entrants. Firms seem to respond to this lack of credibility by backloading investment and the payment of taxes as predicted by theory.
The 5th Workshop on Relational Contracts provides a forum for researchers to meet, present papers, and discuss recent developments in relational governance and dynamic contracts.