Licensing resource tracts. A comparison of auction and discretionary systems

Abstract

This paper uses simulations of a model of a company's decision about the maximum bid value and the optimal investment programme for a resource tract to compare the auction and discretionary systems of licence allocation. The modle includes uncertainty about the size of resource stock and the selling price of extracted resource, as well as risk aversion on the part of the company. It is concluded that an auction system provides the government both with better information about a company's perception of the value of a resource tract and with the potential for considerably higher revenue from its licensing. © 1991.