Monopoly Extraction under Performance Constraints.

Two simple forms of performance constraint--fixed price/output ("take or pay" contracting) and fixed exhaustion date--are analyzed as regards monopolist's behavior and host nation's welfare, assuming linear demand. An early exhaustion date can cause the monopolist to set a falling price. Welfare is improved under exhaustion-date constraint by shifting towards the competitive exhaustion date, with the optimum earlier still. But, with large resources, exhaustion-date constraint is inferior to "take or pay." The significance of institutional aspects is discussed and an appendix demonstrates limited generalization of the falling-price result. Copyright 1989 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research