Corruption as a Local Advantage: Evidence from the Indigenization of Nigerian Oil
American Economic Review · 2025 · Volume 115 · Issue 3
Abstract
Multinationals in the extractive sectors of weak states face resource theft by armed groups. Criminality is often abetted by state corruption, even though firms are willing to pay for protection. I study indigenization in Nigeria's oil sector, which increased local firms' participation substantially. Despite lower quality, local firms increase output by reducing oil theft. A bargaining model illustrates that political connections align law enforcement incentives, solving commitment problems. Data on law enforcement raids show that local firms receive preferential protection. Connections to military elites drive the local advantage. The aggregate gains from indigenization are at most between 2.3 and 5.7 percent of GDP.
Keywords
Bureaucracy, Administrative Processes in Public Organizations, Corruption, Multinational Firms, International Business, Mining, Extraction, and Refining: Hydrocarbon Fuels, Economic Development: Agriculture, Natural Resources, Energy, Environment, Other Primary Products, Natural Resources and Domestic and International Conflicts, Hydrocarbon Resources, Formal and Informal Sectors, Shadow Economy, Institutional Arrangements
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