Extracting information or resource? The Hotelling rule revisited under asymmetric information

Abstract

A concessionaire has private information on the initial stock of resource. A "virtual Hotelling rule" describes how the resource price evolves over time and how extraction costs are compounded with information costs along the optimal extraction path. Fields which are heterogeneous in terms of their initial stocks follow different extraction paths. Resource might be left unexploited in the long run as a way to foster incentives. The optimal contract may sometimes be implemented through royalties and license fees. With a market of concessionaires, asymmetric information leads to a "virtual Herfindahl principle" and to another form of heterogeneity across active concessionaires.

Contracts for the Management of a Non-Renewable Resource under Asymmetric Information and Structural Price Breaks

“…We now turn to the case of asymmetric information, still assuming that the price dynamics remains smooth. The analysis in this section borrows from our companion paper Martimort et al (2018) and we refer the reader to that paper for details of the analysis.…”

“…Next Lemma, which is directly taken from our companion paper Martimort et al (2018), characterizes incentive compatible allocations, i.e., allocations that can be implemented by a particular contract. We postpone below the analysis of contracts that implement the optimal allocation.…”

“…The analysis made in our companion paper Martimort et al (2018) carries over in the present environment mutatis mutandis. In particular, the solution to this problem is obtained by solving separately a collection of maximization problems for each possible realization of θ.…”

“…We use the analysis undertaken in Martimort et al (2018) to analyze the requirement of incentive compatibility on the extraction path. As in that paper, we assume that the government can commit to a contract.…”

“…Our analysis builds on a companion paper (Martimort et al (2018)), which provides a theoretical framework addressing the question of the optimal regulation of a nonrenewable resource. There, we develop a framework where a regulator contracts with a rm for the extraction of a resource.…”