Asymmetric information in oil and gas lease auctions with a national company

a r t i c l e i n f o JEL classification: D44 L71 Keywords: Oil and gas lease auctions Asymmetric information National oil company This paper analyzes bidding behavior in oil and gas tract auctions in Brazil, where the main winner has been Petrobras, a national company. We test predictions from the theory of common-value, first-price, sealed-bid auctions with asymmetric information. The tests indicate that Petrobras was better informed about tract values than other bidders. We show that Petrobras bid higher than its competitors for more profitable tracts, and that it bid more frequently than its competitors for tracts being re-offered after receiving no bids in previous auctions. We also find evidence that Petrobras could bid competitively in a limited number of auctions only, and we discuss how our results can help to improve oil and gas tract auction rules. Information asymmetries determine how bidders behave in common value auctions. Data from various auctions, including timber rights, government securities, and oil and gas tracts, have confirmed that bidders behave similarly to what auction theory with asymmetric information predicts. However, the rules of the auction and other characteristics of the setting determine how bidders behave in equilibrium, and thus the predictions for one auction setting do not necessarily apply to others (Porter, 1995). To evaluate whether these predictions hold more generally , they must be tested in different settings. In this paper, we test one of the most important models of auction theory using new data from oil and gas tract auctions in Brazil. We test predictions from the noncooperative first-price, sealed bid model with asymmetric information studied by Wilson In this model, one bidder is better informed about tract values than its competitors, and we assume in our setting that this bidder is Petrobras, the Brazilian national oil company, which had been a monopolist for more than 40 years before the auctions started. Based on this assumption, the model predicts how Petrobras and its competitors should bid. Our paper is closely related to the empirical literature on private information in oil and gas tract auctions show that bidding behavior in the U.S. outer continental shelf (OCS) oil and gas lease sales matches predictions from the theoretical model discussed above. We adapt Hendricks and Porter's empirical strategy to our setting. Our work contributes to this literature because, despite the fact that most research on oil and gas tract auctions …