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Information Externalities, Free Riding, and Optimal Exploration in the UK Oil Industry

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  • Charles Hodgson
Abstract
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.

Suggested Citation

  • Charles Hodgson, 2024. "Information Externalities, Free Riding, and Optimal Exploration in the UK Oil Industry," NBER Working Papers 33067, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33067
    Note: IO
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    More about this item

    JEL classification:

    • L0 - Industrial Organization - - General
    • L72 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Other Nonrenewable Resources
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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