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Presented By: Energy & Environmental Economics

Energy & Environmental Economics

To Trade or Not to Trade: Oil Leases, Information Asymmetry, and Coase presented by Paul Brehm, University of Michigan

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Abstract:
We exploit a federal oil lease lottery to examine how markets correct for initial misallocation. Lottery participants included oil companies, as well as individuals without the capital or expertise to drill for oil. In the absence of reallocation, we expect less drilling on leases won by individuals. We find that leases won by firms and individuals have similar short- and long-term outcomes, suggesting that secondary markets rapidly and efficiently correct for misallocation to individuals. However, a subset of parcels with nearby oil production have 50% less drilling when they are won by firms. We develop a simple model to demonstrate how information asymmetry adversely affects firms to a greater degree. Because individuals have larger gains from trade, they are more likely to overcome asymmetric information and trade with a nearby producing firm.
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