Abstract
AbstractWe provide evidence that institutions have a strong influence over where oil and gas exploration takes place. We utilise a global data set on the location of exploration wells and national borders. This allows for a regression discontinuity design with the identifying assumption that the position of borders was determined independently of geology. In order to break potential simultaneity between borders, institutions, and activities in the oil sector, we focus on drilling that occurred after the formation of borders and institutions. Our sample covers 88 countries over the 1966–2010 period. At borders, we estimate more than twice as much drilling on the side with better institutional quality. Subsample analyses reveal effects of institutions on exploration drilling in both developing and high income countries, as well as across three types of operating companies. We find that the supermajor international oil companies are particularly sensitive to institutional quality in developing countries. Our findings are consistent with the view that institutions shape both exploration companies’ incentives to invest in drilling and host countries’ supply of drilling opportunities.
Highlights
Institutions, generally defined as ‘the rules of the game in a society’ (North, 1990), are widely considered to be a fundamental cause of economic growth
This paper argues that variation in institutional quality between countries can contribute to understanding the uneven distribution of investments and the distribution of known sub-soil wealth between countries
To get an estimate of the responsiveness of exploration drilling to a given change in institutional quality, we scale our econometric estimates with the level of institutional quality
Summary
Institutions, generally defined as ‘the rules of the game in a society’ (North, 1990), are widely considered to be a fundamental cause of economic growth. This paper uses the setting of oil and gas exploration to estimate the effect of institutional quality on investment.. A new global data set including the geocoded location of oil exploration wells and national borders allows us to examine investments. Our finding suggests that better scores on measures of democracy, autocracy and constraints on the executive branch of government do increase investments in oil exploration This is in agreement with Acemoglu et al (2014), who find a positive effect of democracy on GDP per capita with investments as a channel. Our paper improves on their empirical analysis by using micro data on oil exploration, an identification strategy utilising plausibly exogenous variation in institutional quality and more general measures of institutions.. Data on country size and landlocked status are from CEPII. We use all countries available, except in section 5.2, where we split the sample into developing versus high income countries. We exclude all formally ‘disputed areas’ in the offshore data, given the unclear and contested ownership of such areas. Table A.1 presents descriptive statistics and table B.7 presents the list of included host and neighbouring countries
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