Transaction costs and the value of a good reputation: evidence from the offshore drilling rig market

This paper investigates the role that reputation plays in the determination of transaction costs and contracting outcomes in the offshore oil and gas drilling rig market. The analysis specifies a novel economic model of drilling rig contracting, and estimates econometric models on an original data set to test hypotheses about the factors that determine contracting outcomes. The analysis and results indicate that oil companies capture benefits from drilling contractors with good reputations in the form of reduced transaction costs and lower total costs of transactions. Drilling contractors with good reputations enjoy benefits in the form of increased cost competitiveness which are anticipated to manifest as larger utilization rates for their respective rig fleets.