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To Rent or not to Rent? Mechanics, Causes and Consequences of Ricardian and Quasi-rents in the Oil Industry

Menaldo, Victor and William Gochberg. “To Rent or not to Rent? Mechanics, Causes and Consequences of Ricardian and Quasi-rents in the Oil Industry” (with Will Gochberg). Resources Policy 78, 3 (2022): 102826. DOI:10.2139/ssrn.3758351

Abstract

How are Quasi-rents different from Ricardian Rents? How do both differ from Market Power 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 causes and consequences. Sometimes, the state generates oil rents through appropriation (Quasi-rents); other times, several states engage in collusive behavior to reduce the global supply (Market Power 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 the state imposes price controls on any industry, making it impossible for economic actors to recover their long run costs. And this makes it more likely weak states will continue to appropriate Quasi-rents across economic sectors, fueling underdevelopment.

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