Institutions and the Location of Oil Exploration

We provide evidence that institutions strongly influence where investors drill for oil and gas. At national borders, investors drill on the side with better institutionalquality two times out of three. To identify the effect of institutions, we utilise a global data set on the location of exploration wells and national borders. This allows for a regression discontinuity design, with the key assumption that the position of borders was determined independently of geology. To break potential simultaneity between borders, institutions and activities in the oil sector, we utilise the historical sequence of drilling occurring after the formation of borders and institutions.Our results are consistent with the view that institutions shape exploration companies’ incentives to invest in drilling as wells as host countries’ supply of drilling opportunities. They imply that the observed distribution of natural capital across countries is endogenous with respect to institutions.