A transaction cost model of contract choice: The case of petroleum exploration |
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Authors: | Geoffrey Black |
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Institution: | (1) Boise State University, U.S.A. |
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Abstract: | The growing literature on transaction costs posits that the structures of contracts involving exchange under uncertainty are
influenced by the costs incurred by the contracting parties prior to, as well as after, a contract is signed. This research
investigates the contractual responses to the substantial uncertainty attending the exchange of rights to underground petroleum
deposits. It develops a transaction cost model to explain the payment structure found in these contracts. The model identifies
the major transaction costs associated with the payment types used in oil and gas exploration contracts, including ex ante
measurement costs and ex post production inefficiencies, and explains their effect on contract structure. Testable implications
concerning variations in the payment structure of petroleum exploration contracts are generated and tested using data from
private oil and gas mineral rights leasing contracts in four western states. The study has direct public policy significance
in that it delineates the implications of different payment structures of oil and gas leasing contracts. These implications
can be used to evaluate proposals to reform federal oil and gas leasing policies. In addition, while there has been considerable
analysis of federal offshore oil and gas leasing contracts, there has been a dearth of research on private onshore oil leasing
practices. This study helps to fill this empirical void. |
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