6533b7d9fe1ef96bd126ca7c

RESEARCH PRODUCT

Overreporting Oil Reserves

subject

description

An increasing number of oil market experts argue that OPEC members substantially overstate their oil reserves. While the economic implications could be dire, the incentives for overreporting remain unclear. This paper analyzes these incentives, showing that oil exporting countries may overreport to raise expected future supply, discourage oil-substituting R&D, and hence improve their future market conditions. Overreporting, however, comes at a cost since it must be backed by observable actions and therefore induces costly distortions of supply. Surprisingly, these latter can eliminate other distortions that arise regardless of information asymmetries in presence of endogenous technological change. In this case, overreporting is rational, credible, and cheap.