Discussion Paper Details

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Title: Extracting Information or Resource? The Hotelling Rule Revisited under Asymmetric Information

Author(s): David Martimort, Jérôme Pouyet and Francesco Ricci

Publication Date: January 2017

Keyword(s): asymmetric information, Delegated Management, Non-Renewable resource and Optimal Contract

Programme Area(s): Industrial Organization

Abstract: We characterize the optimal extraction path when a concessionaire has private information on the initial stock of resource. Under asymmetric information, a "virtual Hotelling rule" describes how the resource price evolves over time and how extraction costs are compounded with information costs along an optimal extraction path. In sharp contrast with the case of complete information, fields which are heterogeneous in terms of their initial stocks follow different extraction paths. Some 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 a new form of heterogeneity across active concessionaires. Under asymmetric information, the market price converges faster to its long-run limit, exhibiting more stability.

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Bibliographic Reference

Martimort, D, Pouyet, J and Ricci, F. 2017. 'Extracting Information or Resource? The Hotelling Rule Revisited under Asymmetric Information'. London, Centre for Economic Policy Research.