The Impact of Commitment on Nonrenewable Resources Management with Asymmetric Information on Costs
GATE Working Paper No. 1205
Posted: 26 Apr 2012
Date Written: April 1, 2012
We study the optimal contracts (payment and extraction path) implemented by a regulator unable to commit to long term contracts that delegates the extraction of a nonrenewable resource to a firm. The regulator wishes to maximize the tax revenue and does not know the firm’s efficiency which is private information. As the regulator is unable to commit, the ratchet effect appears. We show that the contracts implemented depend on which types of firms exhaust the stock. If both types exhaust the stock, the contracts are fully separating and similar to those implemented under full commitment. The efficient firm produces the first best and gets an informational rent whereas the inefficient one produces lower quantity. If the stock is not exhausted, the contracts are semi separating and the inefficient firm produces higher quantity than under full commitment and the tax revenue is lower. However, those contracts may not be incentive compatible if the discount factor and the second period price are high and thus the regulator may be forced to implement a pooling contract.
Keywords: nonrenewable resources, commitment, asymmetric information
JEL Classification: Q38, D82
Suggested Citation: Suggested Citation