Natural resource extraction, corruption, and expropriation

We develop a formal model that looks at the mutually endogenous determination of foreign direct investments in the extraction of natural resources, at the decision of host governments to expropriate these investments, and at the level of corruption. Higher investments in resource extraction make expropriation more attractive from the perspective of national governments. A low expropriation risk is in turn an important determinant of international investments and is therefore associated with high levels of resources extraction. Moreover, investments in the resource sector also raise corruption. Our theoretical predictions are confirmed by estimations of a simultaneous equation model in which we endogenize expropriation risk, corruption, and resource extraction.