Sovereign Hold-Up and Technology Adoption: Evidence from Oil & Gas

Abstract

In regulated industries, governments' ability to revise fiscal terms creates sovereign hold-up risk, discouraging irreversible investments. A 1985 Norwegian Supreme Court ruling made retroactive changes to petroleum royalties unconstitutional, strengthening Norway's fiscal commitment relative to the UK’s. Exploiting this ruling and comparing Norway to the UK, we show that credible commitment accelerated the adoption of Enhanced Oil Recovery (EOR), a major extraction technology, and prompted adopters to increase production, expand asset portfolios, and adopt also other technologies, particularly those related to EOR. Reducing sovereign hold-up risk encourages firms to deploy valuable know-how that would otherwise remain idle in the economy.