TAXATION OF PETROLEUM COMPANIES POSSESSING PRIVATE INFORMATION

For countries having petroleum resources, a common objective of the Mi nistry of Energy is to maximise the net total government take from the petroleum industry. Most models of petroleum taxation, assuming symme tric information, recommend neutral taxation. A royalty is not optimal in this case as it gives disincentives for extraction, causing too mu ch of the reservoir to remain unexploited. Through the operating activ ities, however, the companies obtain private information about the cos ts. A low cost company may conceal its information by imitating a high cost company, and must therefore be given an economic compensation (i nformation rent) to be induced to reveal its true costs. An optimal re gulatory response to asymmetric information may involve royalties, as these enable the government to capture a larger fraction of the econom ic rent.