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An 'oil'igopoly theory of exploration

John Boyce and Lucia Vojtassak ()

Resource and Energy Economics, 2008, vol. 30, issue 3, 428-454

Abstract: This paper develops a theory of [`]oil'igopoly exploration of an exhaustible resource. Strategic exploration and production are jointly derived in a three period subgame perfect equilibrium. While the [`]oil'igopoly theory of exploration shares many features with non-strategic models of exploration and production, there is one important difference. The [`]oil'igopoly theory of exploration predicts that firms who exhaust their proved reserves before they can convert their unproved reserves into proved reserves have an incentive to over-explore, relative to the Nash equilibrium level of exploration. A simple empirical prediction is that firms holding smaller proved reserves should be observed doing more exploration. This prediction is consistent with country-level production and reserve data in the post-World War II era.

Date: 2008
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Handle: RePEc:eee:resene:v:30:y:2008:i:3:p:428-454