To rent or not to rent? Mechanics, causes and consequences of Ricardian and Quasi-rents in the oil industry

Abstract

How are Quasi-rents different from Ricardian Rents? Do differences in institutions, rulers’ time horizons, and policies determine what type of rents predominate? Using the oil industry as a laboratory, this paper explicates the key differences between rent types and explores their mechanics, causes and consequences. Sometimes, the state generates oil rents through appropriation (Quasi-rents); or, the underlying basis of oil rents may be a lack of the diffusion of technology or knowhow that therefore allows some firms or oil fields to monopolize a cost advantage that translates into consistently greater economic profits than its rivals (Ricardian Rents). Most simply, rents may bespeak immutable geological features (Ricardian Rents) and have nothing to do with engineering prowess (also Ricardian Rents) or opportunistic holdup by shortsighted state authorities (Quasi-rents). This is similar to when a state with relatively short time horizons imposes price controls on any industry, making it impossible for economic actors to recover their long run costs. And this makes it more likely such weak states will continue to appropriate Quasi-rents across economic sectors, fueling underdevelopment. This helps explain why some oil rich countries are highly developed, including the United States, Canada, and Norway, while others are institutionally dysfunctional and poor, such as Venezuela and Iran.