Bidding and Drilling on Offshore Wildcat Tracts

I study a game in which firms first bid on wildcat tracts and then time their drilling decisions. In an equilibrium bids are used as a coordination device: if player i bid low while player -i bid high, player i waits while player -i drills. This equilibrium is consistent with the empirical findings of Hendricks and Porter (1996). Firms know that by bidding "low" they can be allocated the right to free-ride. This induces "optimistic" firms to submit "low" bids. Nonetheless, this equilibrium need not reduce expected revenues as compared to the benchmark case in which one abstracts from signalling issues.