Lease allocation systems, risk aversion and the resource rent tax

Abstract

This article examines the case of a risk-averse mining firm facing a resource rent tax in order both to incorporate the role of the risk-sharing quality of such a tax and to assess its implications given a government's lease allocation system. The model develops the conditions required for an investment-neutral RRT characterised by a threshold rate of return (r) and a rate of tax (t) and suggests that for an auction system of lease allocation, government revenue could be maximised by setting the tax rate below 100 per cent, but that for a discretionary system, it is in the government's interest to introduce an RRT which is effectively rate-of-return regulation.