Institutions and the location of oil exploration

We provide evidence that institutions strongly influence where oil and gas exploration takes place. To identify the effect of institutions, we utilise a global dataset 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 exploit the historical sequence of drilling occurring after the formation of borders and institutions. At borders, exploration companies choose to drill on the side with better institutional quality 58% of the time. The results are consistent with the view that institutions shape exploration companies' incentives to invest in drilling as well as host countries' supply of drilling opportunities. It follows that the observed distribution of natural capital across countries is endogenous with respect to institutions.