1. Resource-Based and Property Rights Perspectives on Value Creation: The Case of Oil Field Unitization Kim and Mahoney (2002)
Presented by Xia Cao

2. Why is property rights theory important？
The Resource Based View (RBV) suggests that resources that are valuable, rare, inimitable, and non-substitutable (VRIN) increase the likelihood of value creation
Property rights theory (PRT) complements the resource-based view by relaxing the implicit assumption that resources are secure.

3. Potential value creation Realized value creation
Frictions in establishing property rights
Potential value creation
Realized value creation
PRT
RBV
This paper examines frictions through the example of oil field unitization.

4. Property Rights Theory
Property rights are social institutions
Coase (1960) suggests that a resource should be seen as a “bundle of rights”
Alchian (1969) then clarifies this bundle
The right to appropriate
The right to use and change form
The right to transfer

5. Limitations of RBV
RBV makes a simplifying assumption that property rights are secure
There are transaction costs (searching, bargaining and enforcement)
There are agency costs

6. Why PRT works? Property rights theory is in many ways more fundamental
-The “right” determines the extent of the transaction costs and the agency problems
-It defines the rights of stakeholders clearly
Thus property rights help in predicting the potential for value creation

7. Origins of PRT
Coase (1960) introduced property rights into mainstream economics.
Coase Theorem: given zero transaction costs, governance choice between different modes of resource allocation will not matter for economic efficiency.
It suggested that property rights are the reason why firms work
The difficulty in establishing property rights leads to the need for laws which subsequently have an impact on transaction costs

8. The Case of Oil Field Unitization
Oil field unitization is where a single firm is designated as the unit operator to develop/drill the oil reservoir as a whole.

9. The Case of Oil Field Unitization
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?

10. Impediments of Contracting
The length of the contract, the feature of a once-and-for-all contract, the requirement of site-specific investments with little economic salvage value, substantial uncertainty about behavior of contracting parties, and inherent risk involved in drilling for oil
The presence of negative externalities, information asymmetry, and distributional conflicts, leads to suboptimal economic results (a prisoners’ dilemma situation)

11. RBV 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
imperfect resource mobility
But RBV is not sufficient because
Who appropriates matters
Expectations change depending on feedback
So rent appropriation should be plausible from an RBV perspective.
So (well defined) property rights matter in the case of oil field unitization

12. RBV in Terms of PRT
The bundles of property rights promise potential economic rents:
Clearly defined property rights are specific in delineating what utilization are possible with a particular resource.
In the essence, the process of making property rights more precis can be another way of looking at value creation process
Unitization appears to be a valid solution
Yet we see very little of it
Asymmetric information and the likelihood of hold outs
Not only are property rights important but are also challenging to implement

13. Conclusion
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.