Mineral Leasing Policy: Competitive Bidding and the Resource Rent Tax Given Various Responses to Risk*

This paper considers the choice between lump‐sum bidding and a tax conditional on net present value (of which the Resource Rent Tax is a practical example) as methods of collecting rent from mining projects. It demonstrates that there is an optimal combination of the two methods and that the relative emphasis to be placed on each depends heavily on the manner in which investors take risk into account. Four stylized ways in which investors and governments respond to risk are examined and, in addition to the more familiar types of risk, sovereign risk is introduced. The paper argues for the placing of relatively heavy emphasis on the conditional tax.