The Impact of Commitment on Nonrenewable Resources Management with Asymmetric Information on Costs

GATE Working Paper No. 1205

Posted: 26 Apr 2012

See all articles by Julie Ing

Julie Ing

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Date Written: April 1, 2012

Abstract

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

Ing, Julie, The Impact of Commitment on Nonrenewable Resources Management with Asymmetric Information on Costs (April 1, 2012). GATE Working Paper No. 1205, Available at SSRN: https://ssrn.com/abstract=2046031 or http://dx.doi.org/10.2139/ssrn.2046031

Julie Ing (Contact Author)

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

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