Oil producing countries' discount rates
Name
MIT-EL-86-015WP-19524024.pdf
Size
1.68 MB
Format
Adobe PDF
Checksum (MD5)
be8baa4e28b578056f243421eca147fa
Author(s)
Adelman, Morris Albert
Date Issued
1986
Publisher
MIT Energy Lab
Series/Report no.
MIT-EL
86-015WP
Abstract
The small LDCs which own the great bulk of oil resour-
ces are rational agents and calculate with short horizons and
high discount rates. They have pre-commitments to spend much (or
even more than all) of their incomes, hence behave like highly
leveraged corporations. They are also undiversified, hence the
risk factors are set not by covariance with a diversified
portfolio or sources of income, but rather by the variance of the
oil income stream itself. Political risk is additional. High
discount rates act both to raise and lower the depletion rate, so
the net effect is indeterminate without knowledge of costs, not
considered here. High discount rates sharply lower the effective
elasticity of demand, and lead to a cartel policy of "take the
money and run."
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