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

Kenneth Hendricks and Dan Kovenock

RAND Journal of Economics, 1989, vol. 20, issue 2, 164-182

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.

Date: 1989
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