Optimal Selling Strategies for Oil and Gas Leases with an Informed Buyer

Kenneth Hendrix

No 1038, Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science

Abstract: In this paper, we study different allocation mechanisms for selling oil and gas leases when there is a single informed neighbour firm and a fixed number of uninformed nonneighbour firms. We show that if the neighbour firm can be excluded from bidding, the government can capture essentially all the rents using a first-price, sealed bid auction. It should set the reserve price and royalty rate equal to zero, and give the neighbour firm an incentive to reveal its information to ensure that the winning firm uses the efficient drilling rule. If the neighbrou firm cannot be excluded, the government may have to share some of the rents with the neighbour firm. JEL Classification Number: D44, D82

Date: 1993-03
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