The Geoeconomics of Contract Enforcement

Abstract

Historically, contract enforcement between multinationals and host governments relied on military power. In the late 1960s, Western Great Powers—U.S., U.K., France— sharply reduced such interventions, increasing expropriation risk in weakinstitution countries. We exploit this shift as an exogenous change in enforcement using microdata on oil and gas fields worldwide. We find that firms headquartered in these countries delayed (“backloaded”) production by two to four years, converging to the backloading exhibited by other multinationals. This delay caused annual revenue losses of $1 billion per country, offset by higher government rent shares. These patterns are consistent with a shift toward self-enforcing contracts.