Information spillovers between firms can reduce R&D incentives if competitors can free ride on innovations. However, strong property rights may impede cumulative research and lead to inefficient duplication. These effects are particularly relevant in natural resource exploration, where discoveries are spatially correlated. Using UK offshore oil exploration data, I estimate a dynamic model that captures the trade-off between drilling now and waiting to learn from competitors. Removing free-riding incentives increases industry surplus by 52%, while perfect information flow raises it by 24%. Counterfactual policy simulations highlight a trade-off in property rights design: stronger property rights over exploration well data increase the rate of exploration, while weaker property rights increase the efficiency and speed of learning but reduce the rate of exploration. Spatial clustering of each firm's drilling licenses both reduces the incentive to free ride and increases the speed of learning.
Authors
- Acknowledgements & Disclosure
- This research was supported by the Israel Dissertation Fellowship through a grant to the Stanford Institute for Economic Policy Research. I am grateful to Liran Einav, Matthew Gentzkow, Timothy Bresnahan, Paulo Somaini, Lanier Benkard, Brad Larsen, Nikhil Agarwal, Phil Haile, Steve Berry, Ariel Pakes, Ken Hendricks, Jackson Dorsey, Linda Welling, and participants at various seminars and conferences for helpful comments on this project. Thanks also to Oonagh Werngren and Jen Brzozowska for help with sourcing the data. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w33067
- Pages
- 72
- Published in
- United States of America
Table of Contents
- Introduction 3
- UK Oil Exploration: Setting and Data 7
- Technology 7
- Regulation 8
- Data 11
- A Model of Spatially Correlated Beliefs 12
- Statistical Model of the Distribution of Oil 13
- Interpretation as a Bayesian Prior 15
- Beliefs and Development Payoffs 17
- Descriptive Evidence 18
- Exploration Drilling Patterns 18
- An Econometric Model of Optimal Exploration 22
- Full Information 22
- Asymmetric Information 25
- Estimation & Identification 28
- Parameterization 28
- Estimation 29
- Identification 32
- Results 34
- Estimates 34
- Quantifying the Effects of Information Spillovers 36
- Counterfactual Property Rights Policy 40
- Conclusion 43
- Details of Logistic Gaussian Process Model 48
- Estimation Details 49
- Estimation of Development Payoffs 49
- Estimating Conditional Choice Probabilities 51
- Estimating Belief Functions 54
- Estimating Dynamic Parameters 55
- Technical Details on Distribution of States 58
- Estimation of License Issuing Process 58
- Identification Details 60
- Simulation Details 62
- Additional Tables and Figures 64
