Distortions in Oil Contract Allocation and Environmental Damage in the Presence of Corruption

Abstract

This article investigates how distortions in oil contract allocation can alter a government official’s decisions and shows that corruption enlarges the parameter space over which multinational oil companies win the contract against the smaller companies. It is found that corruption superficially creates an equilibrium outcome that looks efficient even when it is not, and diminishes the official’s concern for environmental damage by weighing damage to the public less and oil revenues more. Sensitivity analyses show that for all levels of environmental damage and corruptibility, multinational oil companies always win the contract. An important policy implication is that corruption distorts optimal decisions and causes oil contract allocation decisions to be based primarily on monetary benefit than social welfare.