Relinquishing Riches: Auctions vs Informal Negotiations in Texas Oil and Gas Leasing

49 Pages Posted: 1 Apr 2019

See all articles by Thomas Covert

Thomas Covert

University of Chicago - Booth School of Business

Richard Sweeney

Boston College - Department of Economics

Date Written: March 2019

Abstract

This paper compares outcomes from informally negotiated oil and gas leases to those awarded via centralized auction. We focus on Texas, where legislative decisions in the early twentieth century assigned thousands of proximate parcels to different mineral allocation mechanisms. We show that during the fracking boom, which began unexpectedly decades later, auctioned leases generated at least 40 percent larger upfront payments and 60 percent more output than negotiated leases did. These results suggest large potential gains from employing centralized, formal mechanisms in markets that traditionally allocate in an unstructured fashion, including the broader $3 trillion market for privately owned minerals.

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Suggested Citation

Covert, Thomas and Sweeney, Richard, Relinquishing Riches: Auctions vs Informal Negotiations in Texas Oil and Gas Leasing (March 2019). NBER Working Paper No. w25712. Available at SSRN: https://ssrn.com/abstract=3363450

Thomas Covert (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Richard Sweeney

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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