Extracting Common Oil: Cooperation or Competition?

Abstract

This paper considers how likely it is that a given number of agents who share a homogeneous oil reservoir will exploit the reservoir for their common benefit. A game-theoretical model is used, examining whether one agent would profit from deviating from the cooperative strategy, given that the remaining agents would follow a subgame-perfect retaliation strategy. The paper also examines the sensitivity of the cooperative solution to the number of agents, the time it takes to discover a deviation, the value of production relative to investment, and the discount rate. It is found that the cooperative solution is very sensitive to the number of agents; with more than three agents the cooperative solution becomes very unlikely.