OPTIMAL RESOURCE ROYALTIES WITH UNKNOWN AND TEMPORALLY INDEPENDENT EXTRACTION COST STRUCTURES

We study optimal nonrenewable resource royalty contracts when the extr acting agent has private information on costs. This is a dynamic incen tive problem in which the repeated relationship between the principal and the agent is constrained by initial reserves. Commitment is limite d to one period and costs are intertemporally independent. Compared wi th full information extraction, information asymmetry shifts productio n to the future when the optimal contract requires exhaustion in two p eriods. When exhaustion by all types in two periods is not warranted, the effect on the terminal period is ambiguous and the output of even the lowest cost firm is always distorted.