Risk sharing and incentives in Norwegian petroleum extraction

Distinguishing between idiosyncratic and systematic risk, and taking into account that the government is only able to monitor the companies' efforts to reduce costs and increase extraction in an imperfect way (moral hazard), criteria for optimal risk sharing between the Norwegian government and the petroleum companies are examined. The Norwegian practice is compared with the theoretical recommendations, and it is suggested that deviations can be explained by political constraints. (C) 1999 Elsevier Science Ltd. All rights reserved.