Resource Investments and the Timing of Tax Deductions

We present quasi-experimental evidence that the timing of tax deductions matters for investments. Using firm-level data for Norway and the UK over 1995-2015, we estimate the effects of introducing immediate tax refunds paid out in cash in the Norwegian petroleum sector. We find a 63% increase in exploration investment and a 23% increase in the number of oil and gas discoveries. Consistent with the presence of financial frictions, the cash injection led oil companies to invest in projects that were economically profitable on average. The response was strongest among the firms most likely to be financially constrained. In sum, our empirical findings support the hypothesis that the timing of resource rent taxes matters when firms face financial frictions.