Kim, Jongwook and Joseph T. Mahoney (2002). Resource-Based and Property Rights Perspectives on Value Creation: The Case of Oil Field Unitization. Managerial and Decision Economics, 23 (4): Presented by Jiyoon Chung

Overview  Research question: Why in some instances are there large and persistent economic gaps between potential and realized values?  Expand the scope of resource-based theory to a business context with frictions in establishing property rights (e.g., oil field unitization)  Peteraf’s (1993) resource-based framework provides insights concerning potential value, and the property rights theory proves complementary to the resource-based theory in evaluating the realized value creation (p. 236).

 Inefficiency in contracting for oil field unitization results from the joint condition of: Multiple landowners The migratory nature of oil  Important variables for efficient extraction The rate of production The location of the wells  Individual competitive drilling goes against Finding optimal location Maintaining efficient extraction rate  Therefore, oil field unitization is the most complete solution. But why is this solution not realized? Oil Field Unitization

Property Rights Theory and Oil Field Unitization  The market does not inevitably lead to (Pareto) efficient outcomes since political dynamics, third-party enforcement, and the overall institutional framework are influential factors in determining effective property rights (p.229).  The expected distribution of wealth and political power has consequences for assignment of property rights (p. 233).

Impediments to Contracting  The length of the contract, the feature of a once-and-for all contract, the requirement of site-specific investments, substantial uncertainty about behavior of contracting parties, and inherent risk involved in drilling for oil.  Asymmetric information about valuations of individual leases that intensifies distributional conflicts (Libecap, 1989)  The presence of negative externalities, information asymmetry, and distributional conflicts, leads to a suboptimal economic result (a prisoners’ dilemma situation) (p. 234).

Resource-Based Theory and Oil Field Unitization  The oil field satisfies the four criteria as a source of potential economic rents (Peteraf, 1993): Resource heterogeneity Ex post limits to competition Ex ante limits to competition Imperfect resource mobility  The property rights theory complements Peteraf’s (1993) resource-based framework for the purpose of moving beyond potential value creation to analyze realized value creation.

Resource-Based Theory in Terms of Property Rights Theory  The bundles of property rights promise potential economic rents: Clearly defined property rights are specific in delineating what utilizations are possible with a particular resource.  In essence, the process of making property rights more precise can be another way of looking at the value creation process (p. 235).

Conclusions  The more valuable the resources, the more incentives there are to make property rights of resources more precise. The more precisely delineated the property rights of resources, the more valuable resources become.  A full resource-based analysis of value creation must incorporate the role of property rights to internalize externalities and to solve prisoners’ dilemma problems of common-pool resources.