Abstract
In theory, fossil fuel subsidies should be avoided because they reinforce the intrinsic negative externality of fossil fuels. However, subsidies to domestic fuel consumption remain a common practice among many oil-producing countries. The reason for this practice is often attributed to the political regime of a country, but to date, there is no clear evidence supporting this hypothesis. In particular, the impact of not being democratic on fossil fuel subsidies has thus far been elusive. We propose a theoretical model to shed light on this phenomenon, which we test empirically. We find robust evidence that non-democratic oil-exporting countries exhibit a unique indirect effect on domestic prices that renders them lower compared to other types of countries.
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