Institutions and the Location of Oil Exploration

The spatial distribution of oil is determined by natural geography alone. However, we show that the distribution of oil exploration is affected by the quality of countries’ institutions. A global data set on the precise location of oil wells and national borders allows for a regression discontinuity design and causal inference. Crossing a national border, moving from the average worse to average better institutional quality, generates a positive jump in the predicted number of wells by 150% in the sample of developing countries. Correspondingly, a one standard deviation increase in institutional quality increases the likelihood of drilling by about 250%. The findings underscore that proved oil reserves are an endogenous economic outcome and lend support to the hypothesis that institutions are a fundamental determinant of economic performance.