Dynamic Taxation of Non-Renewable Natural Resources under Asymmetric Information about Reserves

Abstract

Optimal regulation is developed for a case with type-dependent dynamics in costs. In exploiting nonrenewable natural resources, a government faces the problem that extraction companies possess private information about the size of the reserves. Optimal contracts, in a two-period framework, distort both the extent and the pace of depletion. The regulatory optimum is implementable by a menu of tangent planes, generated by license fees and royalties, or by a corporate income tax system containing type-dependent depletion allowances and tax-exempted income levels. If the terminal time is endogenized, it is optimal also to distort the number of extraction periods.