Testing the Assumptions and Predictions of the Hotelling Model

Calvin Atewamba, Bruno Nkuiya
  • Environmental and Resource Economics, May 2015, Springer Science + Business Media
  • DOI: 10.1007/s10640-015-9922-0

Photo by Brandon Griggs on Unsplash

Photo by Brandon Griggs on Unsplash

What is it about?

This paper empirically examines whether the assumptions and predictions of the Hotelling model are consistent with patterns observed in data. We consider nonlinear functional forms for the extraction cost and resource demand to develop an empirical Hotelling model with technological progress and stock dependent extraction costs. Using panel data on fourteen nonrenewable natural resources to estimate this empirical Hotelling model, we get qualitatively different results as compared to the related literature. We find evidence of stock-dependent extraction costs for most resources. There is no evidence against the linearity of the optimal extraction rate in the resource stock for almost all resources studied. Furthermore, the Hotelling model may sustain a zero long-run growth rate in resource prices. These results depend on whether firms use different extractive technologies or whether the structural break observed on resource prices is taken into account.

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The following have contributed to this page: Bruno Nkuiya