If ExxonMobil invests in Venezuela\'s oil fields, it runs the risk that Venezuel

Question

If ExxonMobil invests in Venezuela's oil fields, it runs the risk that Venezuela will later partially nationalize the assets. The payoffs are represented in the game tree illustrated in the figure to the right. Suppose that the parties could initially agree to a binding contract that Venezuela would pay ExxonMobil x dollars if Nationalize (32,128) it nationalizes the oil fields. How large does x have to be for ExxonMobil to invest in Venezuela? ernme Venezuela The value of x would have to be at least equal to sfor ExxonMobil to invest in Venezuela. (Enter your (80,80) response as a whole number.) Don't nationalize ExxonMobi Elsewhere (40,0)

Explanation / Answer

$8. This is because Exxon gets atleast 32 when it invests in Venezuela but 40 when it invests elsewhere. If Venezuela agrees to pay Exxon atleast 8 more then Exxon would want to invest in it as then Exxon will be atleast as well off as not investing in Venezuela even if the government nationalise assets. Also, Exxon will then want to invest in Venezuela as there is a possibility that the government donot nationalise assets.

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