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Asymmetric Information, Information Externalities, and Efficiency: The Case of Oil Exploration

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Kenneth Hendricks
Dan Kovenock

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Abstract

In this article we examine the effect of private information and information externalties on the ex post efficiency of investment in oil exploration. We show that too much drilling tends to occur if firms believe that the area is likely to contain a sizeable pool of oil, and too little drilling occurs if the opposite is true. Bargaining with well-defined property rights to the information externality can eliminate underinvestment, but overinvestment remains a problem because firms have an incentive not to disclose their private information.

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File URL: http://links.jstor.org/sici?sici=0741-6261%28198922%2920%3A2%3C164%3AAIIEAE%3E2.0.CO%3B2-H&origin=repec
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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 20 (1989)
Issue (Month): 2 (Summer)
Pages: 164-182
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Handle: RePEc:rje:randje:v:20:y:1989:i:summer:p:164-182

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  1. Richard Zeckhauser & Jayendu Patel & Darryll Hendricks, 1991. "Nonrational Actors and Financial Market Behavior," NBER Working Papers 3731, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. James L. Smith, 2004. "The Option to Try Again: Valuing a Sequence of Dependent Trials," Working Papers 0404, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research. [Downloadable!]
  3. Hikmet Gunay, 2008. "Information Aggregation Under Strategic Delay," Economics Bulletin, Economics Bulletin, vol. 12(23), pages 1-8. [Downloadable!]
  4. Robert H. Porter, 1992. "The Role of Information in U.S. Offshore Oil and Gas Lease Auctions," Discussion Papers 1008, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  5. Dirk Bergemann & Juuso Valimaki, 1999. "Experimentation in Markets," Cowles Foundation Discussion Papers 1214, Cowles Foundation, Yale University. [Downloadable!]
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  6. Blecherman, Barry, 1996. "Is There a Winner's Curse In The Market For Baseball Players? Evidence From The Field," Working Papers 966, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  7. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9164, University Library of Munich, Germany. [Downloadable!]
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  8. Bolton, P., 1996. "Strategic experimentation : a revision," Discussion Paper 27, Tilburg University, Center for Economic Research. [Downloadable!]
  9. Angela Chang & Shubham Chaudhuri & Jith Jayaratne, 1997. "Rational herding and the spatial clustering of bank branches: an empirical analysis," Research Paper 9724, Federal Reserve Bank of New York. [Downloadable!]
  10. Kobayashi, Hajime & Suehiro, Hideo, 2008. "Leadership by Confidence in Teams," MPRA Paper 10717, University Library of Munich, Germany. [Downloadable!]
  11. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-70, Summer. [Downloadable!] (restricted)
  12. Décamps, Jean-Paul & Mariotti, Thomas, 2000. "Irreversible Investment and Learning Externalities," IDEI Working Papers 97, Institut d'Économie Industrielle (IDEI), Toulouse.
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