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Extracting Common Oil: Cooperation or Competition?

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  • Rognvaldur Hannesson

Abstract

This paper considers how likely it is that a given number of agents who share a homogeneous oil reservoir will exploit the reservoir for their common benefit. A game-theoretical model is used, examining whether one agent would profit from deviating from the cooperative strategy, given that the remaining agents would follow a subgame-perfect retaliation strategy. The paper also examines the sensitivity of the cooperative solution to the number of agents, the time it takes to discover a deviation, the value of production relative to investment, and the discount rate. It is found that the cooperative solution is very sensitive to the number of agents; with more than three agents the cooperative solution becomes very unlikely.

Suggested Citation

  • Rognvaldur Hannesson, 2000. "Extracting Common Oil: Cooperation or Competition?," The Energy Journal, , vol. 21(2), pages 105-120, April.
    • Handle: RePEc:sae:enejou:v:21:y:2000:i:2:p:105-120
    DOI: 10.5547/ISSN0195-6574-EJ-Vol21-No2-5
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    References listed on IDEAS

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    1. Libecap, Gary D & Smith, James L, 1999. "The Self-Enforcing Provisions of Oil and Gas Unit Operating Agreements: Theory and Evidence," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 15(2), pages 526-548, July.
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