Endogenous Oil Rents

Abstract

Oil rents may at times fall like “manna from heaven” into the fiscal coffers of the state. Yet politicians also make decisions that can increase or decrease the extent to which oil rents accrue to the central government. Though counterintuitive, various evidence suggests that politicians sometimes do not seek to maximize the state’s claim on rents. In this article, the author substantiates this observation with evidence from Venezuela and then develops a formal model of the relationship between electoral competition and rent choice. The author argues that the model can explain why politicians allowed the central government’s share of rents to decline in Venezuela beginning in the 1990s, even though a decline in rents plausibly contributed to the destabilization of Venezuelan democracy. The argument illuminates patterns of rent capture in other cases, whereas the model may be useful in many settings in which the gains from economic investment are realized over several electoral terms.