The Influence of Private Contractual Failure on Regulation: The Case of Oil Field Unitization

An analysis of the interdependence between regulation and private contractual failure reveals that the feasible range of regulation is restricted by the same forces that block private agreement. The focus of the study is oil field unitization regulation in Oklahoma, Texas, and Wyoming (federal lands) from 1948 through 1975. Despite large potential gains from unitization, private negotiations fail because of lease heterogeneities and information problems regarding lease value estimates. In response, the federal and state governments have adopted strikingly different policies to encourage unitization with different results. Only the federal government's regulations are effective because they surmount information problems. Texas has the least successful regulation. The paper argues that the policy differences are due to the political influence of small firms that benefit from nonunitized production. 25 references, 2 tables.