Essay On Negotiations Over Mineral Extraction Title With Adverse Selection

Nonrenewable resource extraction often involves a bilateral or multilateral exchange between government-mining owner-and multinational mining companies-mining operators. More precisely, the relevant modality is a concession contract in which the owner delegates the extraction of the resource to one or several mining firms in return for payment.In addition, contracts between developing countries governments and multinational mining companies are often performed in secrecy, with confidentiality clauses that prevent the public from knowing exactly what revenues are given to the State and what rights and privileges have been awarded to the mining companies.For the last years, concession contract analysis has focused on the aspects of bilateral and multilateral relations raising the problem of asymmetric information between the mining owner-the principal-and the mining operator-the buyer.Clearly, multinational mining firms are selected for their specialized performance which is not completely apparent for the owner; they have greater experience in evaluating the in-ground reserve potential, the quality of deposits, and thus the operating expenditures related their mining activity. In other words, mining operators have private information.This thesis brings insights on how.to improve negotiations over mineral extraction titles with adverse selection phenomena; by proposing optimal strategies.In the case of negotiations over mineral extraction titles with static bilateral asymmetric information; we analyze a possible best outcome from negotiations between a poor country and a multinational mining company over a mineral extraction contract.While showing that, when the terms of contract are prepared on the basis of erroneous information, the resulting contract is inefficient; when both the mine owner and the mine operator have private information at the time of trading, and when each contracting party has a continuous distribution of types, with strictly positive density function.However, to reduce the inefficiency the agents'valuations should be traded at auction, or resort to arbitration.In this case, as second-best optimal contract, the simple double auction or the final offer arbitration are the best strategies; because, the average rent amount is the optimal result of the negotiation, for both strategies.In the case of negotiations over mineral extraction titles with static multilateral asymmetric information; we examine how a developing country government may improve his rent share while negotiating with several multinational mining companies.In maximizing the expected net surplus that government may take by granting the extraction rights of a mineral deposit; this one faces the problem that extraction companies possess private information about extraction capacities (adverse selection).Using a symmetric auction strategy, and assuming that the mining operators number increases, we show that the government is able to extract all the gains from the trade.Since the property right to extract the mineral deposit is allocated to the high-valuation mining company, the mining owner expected net revenue will converges to its highest value; and this value depends on the government prior belief, the agent bargaining strength, and on the agents'relative weak or strong opportunity costs.