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Date added: 1.2.2015
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The government, as a principal, may seek to induce a private investor, as anagent, to build and operate an unconventional-oil production plant topromote early production experience with such plants. Given this goal, facing significant uncertaintyMoreThe government, as a principal, may seek to induce a private investor, as anagent, to build and operate an unconventional-oil production plant topromote early production experience with such plants. Given this goal, facing significant uncertainty about the future, the government wants tolimit the cost to the public treasury of doing this. This report offers ananalytic way to design and assess packages of policy instruments that thegovernment can use to achieve its goal. It starts with general principles ofthe economic theories of contracting and agency. Looking across manyalternative futures helps the authors design incentive packages that arerobust from a private perspective and limit costs to the government. Asthese principles would predict, cash-flow analysis demonstrates thecost-effectiveness of using investment incentives rather than operatingincentives and the powerful effect that a higher debt share has on theprivate rate of return. Cash-flow analysis also reveals specificopportunities that the government has to change course among policyalternatives as it seeks the lowest-cost way to increase the private rate ofreturn associated with a project Federal Financial Incentives to Induce Early Experience Producing Unconventional Liquid Fuels: Using Physical Reasoning to Solve Problems by Frank Camm
