Taxation of petroleum companies possessing private information

For countries having petroleum resources, a common objective of the Ministry of Energy is to maximise the net total government take from the petroleum industry. Most models of petroleum taxation, assuming symmetric information, recommend neutral taxation. A royalty is not optimal in this case as it gives disincentives for extraction, causing too much of the reservoir to remain unexploited. Through the operating activities, however, the companies obtain private information about the costs. A low cost company may conceal its information by imitating a high cost company, and must therefore be given an economic compensation (information rent) to be induced to reveal its true costs. An optimal regulatory response to asymmetric information may involve royalties, as these enable the government to capture a larger fraction of the economic rent.