Misreporting of Natural Resource

A number of oil market experts argue that OPEC members substantially overreport their reserves. The potential damage for the world economy calls for an analysis of the motives and the preconditions for successful misreporting of natural resource reserves. Based on a signalling game within an international trade model, this article develops a framework for such an analysis. Exporting countries with private information about total reserves use current supply as a signal for remaining reserves. An exporting country is said to engage successfully in misreporting when current supply is uninformative about remaining reserves — i.e. when a pooling equilibrium prevails. It is shown that a pooling equilibrium exists if and only if, first, R&D for substitutes of the natural resource is responsive to expected future supply and second, the signal’s cost is limited. Finally, regardless of information asymmetries exporters of the natural resource backload supply to discourage substitution R&D.