UC Davis Institute of Transportation Studies

This paper uses a structural econometric model to analyze the investment timing game in offshore petroleum production that ensues on wildcat tracts in U.S. federal lands off the Gulf of Mexico. When individual petroleum-producing firms make their exploration and development investment timing decisions, there are two types of externalities that they do not internalize: an information externality and an extraction externality. The model I develop enables me to estimate the structural parameters governing each firm’s investment timing decisions and therefore to assess the net effect of these externalities. According to my results, the extraction externality appears to dominate the information externality. Moreover, decreasing the lease term may increase ex ante tract value and hence government profits. The econometric methodology presented in this paper can be employed to analyze any problem of dynamic multi-stage strategic decision making in the presence of externalities.