Authoritarian regimes and natural resources

Abstract

In theory, fossil fuel subsidies should be avoided because they reinforce the intrinsic negative externality of fossil fuels. However, subsidies to domestic fuel consumption remain a common practice among many oil-producing countries. The reason for this practice is often attributed to the political regime of a country, but to date, there is no clear evidence supporting this hypothesis. In particular, the impact of not being democratic on fossil fuel subsidies has thus far been elusive. We propose a theoretical model to shed light on this phenomenon, which we test empirically. We find robust evidence that non-democratic oil-exporting countries exhibit a unique indirect effect on domestic prices that renders them lower compared to other types of countries.