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Testing the Assumptions and Predictions of the Hotelling Model

Author

Listed:
  • Calvin Atewamba

    (Institute for Natural Resources in Africa, United Nations University)

  • Bruno Nkuiya

    (Bren School of Environmental Science and Management, University of California Santa Barbara)

Abstract

In this paper, we empirically examine 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.

Suggested Citation

  • Calvin Atewamba & Bruno Nkuiya, 2017. "Testing the Assumptions and Predictions of the Hotelling Model," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 66(1), pages 169-203, January.
    • Handle: RePEc:kap:enreec:v:66:y:2017:i:1:d:10.1007_s10640-015-9922-0
    DOI: 10.1007/s10640-015-9922-0
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    References listed on IDEAS

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    Cited by:

    1. Christopher Costello & Bruno Nkuiya & Nicolas Querou, 2017. "Extracting spatial resources under possible regime shift," Working Papers hal-01615939, HAL.
    2. Roberto Ferreira da Cunha & Antoine Missemer, 2020. "The Hotelling rule in non‐renewable resource economics: A reassessment," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 53(2), pages 800-820, May.
    3. Bai, Yiyi & Okullo, Samuel J., 2018. "Understanding oil scarcity through drilling activity," Energy Economics, Elsevier, vol. 69(C), pages 261-269.
    4. Gregor Schwerhoff & Ottmar Edenhofer & Marc Fleurbaey, 2020. "Taxation Of Economic Rents," Journal of Economic Surveys, Wiley Blackwell, vol. 34(2), pages 398-423, April.
    5. Zeng, Yu & Wei, Xuan & Yao, Yuan & Xu, Yinliang & Sun, Hongbin & Kin Victor Chan, Wai & Feng, Wei, 2023. "Determining the pricing and deployment strategy for virtual power plants of peer-to-peer prosumers: A game-theoretic approach," Applied Energy, Elsevier, vol. 345(C).
    6. Youmanli Ouoba, 2023. "Testing the necessary conditions for sustainability in the mining sector in Burkina Faso," Mineral Economics, Springer;Raw Materials Group (RMG);Luleå University of Technology, vol. 36(1), pages 1-12, January.
    7. Chuku, Chuku & Lang, Lin & Lim, King Yoong, 2023. "Public debt, Chinese loans and optimal exploration–extraction in Africa," Energy Economics, Elsevier, vol. 118(C).
    8. Jiafeng Gu, 2021. "Determinants of biopharmaceutical R&D expenditures in China: the impact of spatiotemporal context," Scientometrics, Springer;Akadémiai Kiadó, vol. 126(8), pages 6659-6680, August.

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