Auctions combined with ex post taxation—expected revenue when three parties want a piece of the cake

Abstract

In order to exploit their natural resources efficiently, states are normally obliged to rely on private mining companies (lessees), which in turn must rely on e.g. hired labour and different suppliers of equipment. This third party will try to exploit any negotiating power that might arise when the right to exploit the resource has been allocated to the lessee. If this succeeds, the size of the rent available to the resource owner and the lessee will be reduced. This paper focusses on rent sharing between the state, the lessee and labour under various combinations of ex ante and ex post rent taxation. In the paper it is shown that in a setting with affiliated values, cash bonus bidding combined with a royalty results in a double dividend: The state’s share of the pie increases and the wage pressure decreases. This result is of particular relevance to nations where the extractive sector represents a relatively large share of the economy.