Economics Department


Date of this Version



White paper issued November 14, 2011. Copyright (c) 2011 F. Gregory Hayden.


The purpose of this report is to investigate and explain conflicts involved in the ongoing licensing process whereby TransCanada is attempting to obtain permission from the U.S. Department of State to build a pipeline (named Keystone XL) from the tar sand oil fields of Alberta, Canada to the Gulf Coast. The economic concepts important in guiding this investigation are: (1) rules are important, (2) moral hazard, and (3) corporate strategic misinformation.

Economists emphasize the importance of rules for structuring and determining the working of economic institutions and the social institutions that support, regulate, and enforce the economic institutions. The kind of economic structure that emerges from the proposed Keystone XL pipeline very much depends on what rules are followed. The term "rules" is used here to mean laws, norms, standards, criteria, regulations, and requirements. As Nobel Prize economist Elinor Ostrom and her co-author Xavier Basurto have recently emphasized, rules are the result of efforts to achieve order and predictability by defining actions that are required, permitted, or forbidden to be taken in particular situations "or face the likelihood of being monitored, and sanctioned in a predictable fashion" (2011, p. 322). "A major task for those studying a problem area is to identify the convergence of various rules, socioecological properties, and situations" (Hayden 2009, p. Ill). The task here is to investigate particular situations of the Keystone XL pipeline licensing process and to identify and discuss whether there are conflicts with rules. If the pipeline is not constructed according to appropriate rules, the economic results it produces cannot be considered efficient.

A moral hazard is a perverse incentive that rewards one organization for exploiting another. Moral hazards are created by institutions---often government agencies. Moral hazards are generated when perverse incentives are provided that encourage an organization to act in a way so that it hurts others in the economy. For example, if a government agency fails to enforce regulations to control adverse corporate behavior, the hazard is that more and more corporations will undertake the immoral behavior that is detrimental to society at large.

Corporate strategic misinformation is when corporations strategically misinform a government agency, for example, when a corporation provides an environmental protection agency with incorrect pollution data.

We see below that these three economic concepts are important for understanding conflicts in the Keystone XL pipeline licensing process.

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