| Abstract: | Discretionary systems of awarding exploration and production licences, such as that on the UK continental shelf, often use the size of proposed work programmes as an important criterion. This paper models the effect of strategic considerations on the choice of work programme in such licensing systems. The model incorporates uncertainty about resource size and about the work programmes proposed by competing companies. It is found that competition between bidders results in a level of capital investment which exceeds the profit maximizing allocation. It is concluded that licensing systems which emphasize size of work programme can result in strategic but wasteful overcapitalization. |
