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Strategic Decision-Making with Information and Extraction Externalities: A Structural Model of the MultiStage Investment Timing Game in Offshore Petroleum Production

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  • C.-Y. Cynthia Lin

    (University of California at Davis)

Abstract

When individual petroleum-producing firms make their exploration and development investment timing decisions, positive information externalities and negative extraction externalities may lead them to interact strategically with their neighbors. This paper examines whether these inefficient strategic interactions take place by estimating a structural econometric model of the firms' multi-stage investment timing game. Results show that firms interact strategically on small tracts but not on large tracts. For small tracts, having a neighboring tract explored reduces real profits by about $26 million, while having a neighboring tract developed raises real profits by about $3.5 million. © 2013 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • C.-Y. Cynthia Lin, 2013. "Strategic Decision-Making with Information and Extraction Externalities: A Structural Model of the MultiStage Investment Timing Game in Offshore Petroleum Production," The Review of Economics and Statistics, MIT Press, vol. 95(5), pages 1601-1621, December.
    • Handle: RePEc:tpr:restat:v:95:y:2013:i:5:p:1601-1621
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    Citations

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    Cited by:

    1. Jonathan A. Cook and C.-Y. Cynthia Lin Lawell, 2020. "Wind Turbine Shutdowns and Upgrades in Denmark: Timing Decisions and the Impact of Government Policy," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 81-118.
    2. Rapson, David, 2014. "Durable goods and long-run electricity demand: Evidence from air conditioner purchase behavior," Journal of Environmental Economics and Management, Elsevier, vol. 68(1), pages 141-160.
    3. Rojas Valdes, Ruben I. & Lin Lawell, C.-Y. Cynthia & Taylor, J. Edward, 2017. "The Dynamic Migration Game: A Structural Econometric Model and Application to Rural Mexico," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 259184, Agricultural and Applied Economics Association.

    More about this item

    Keywords

    investment timing game; structural econometrics; petroleum production;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels

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