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

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  • Kenneth Hendricks
  • Dan Kovenock

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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Bibliographic 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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Cited by:
  1. Bergemann, Dirk & Valimaki, Juuso, 2000. "Experimentation in Markets," Review of Economic Studies, Wiley Blackwell, vol. 67(2), pages 213-34, April.
  2. Christoph March, 2011. "Adaptive social learning," PSE Working Papers halshs-00572528, HAL.
  3. King, Stephen P., 1995. "Search with free-riders," Journal of Economic Behavior & Organization, Elsevier, vol. 26(2), pages 253-271, March.
  4. Daron Acemoglu & Kostas Bimpikis & Asuman Ozdaglar, 2008. "Experimentation, Patents, and Innovation," NBER Working Papers 14408, National Bureau of Economic Research, Inc.
  5. James L. Smith & Rex Thompson, 2006. "Rational Plunging and the Option Value of Sequential Investment The Case of Petroleum Exploration," Working Papers 0602, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  6. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
  7. Kobayashi, Hajime & Suehiro, Hideo, 2008. "Leadership by Confidence in Teams," MPRA Paper 10717, University Library of Munich, Germany.
  8. Decamps, J.-P. & Mariotti, T., 2000. "Irreversible Investment and Learning Expternalities," Papers 00-534, Toulouse - GREMAQ.
  9. Lin, C.-Y. Cynthia & Leighty, Wayne, 2007. "Government Leasing Policy and the Multi-Stage Investment Timing Game in Offshore Petroleum Production," Institute of Transportation Studies, Working Paper Series qt1rj6v4df, Institute of Transportation Studies, UC Davis.
  10. Lin, C.-Y. Cynthia, 2007. "The Multi-Stage Investment Timing Game in Offshore Petroleum Production: Preliminary results from an econometric model," Institute of Transportation Studies, Working Paper Series qt70t9n2r3, Institute of Transportation Studies, UC Davis.
  11. Sweeney, James L., 1993. "Economic theory of depletable resources: An introduction," Handbook of Natural Resource and Energy Economics, in: A. V. Kneese† & J. L. Sweeney (ed.), Handbook of Natural Resource and Energy Economics, edition 1, volume 3, chapter 17, pages 759-854 Elsevier.
  12. 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.
  13. Fissel, Benjamin E & Glibert, Ben, 2010. "Exogenous Productivity Shocks and Capital Investment in Common-pool Resources," University of California at San Diego, Economics Working Paper Series qt1qp1g9ts, Department of Economics, UC San Diego.

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