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Strike When the Force Is with You: Optimal Stopping with Application to Resource Equilibria

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  • Graham A. Davis

Abstract

Optimal investment in a nonrenewable resource project occurs when the rate of increase of the project's forward value falls to the force of interest. This stopping rule yields a financial interpretation of resource quality as being a property of the project rather than of individual units of reserves. It also leads to re-interpretations of (a) rent as the present value of the project rather than of units of reserves and (b) Hotelling's insight as, not a rule for the path of rents, but an equilibrium algorithm for price. The analysis is extended to sequential development of pesticides, antibiotics, and forests. Copyright 2007, Oxford University Press.

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  • Graham A. Davis, 2007. "Strike When the Force Is with You: Optimal Stopping with Application to Resource Equilibria," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(2), pages 461-472.
    • Handle: RePEc:oup:ajagec:v:89:y:2007:i:2:p:461-472
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    File URL: http://hdl.handle.net/10.1111/j.1467-8276.2007.01016.x
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    Cited by:

    1. Anthony J. Venables, 2014. "Depletion and Development: Natural Resource Supply with Endogenous Field Opening," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 1(3), pages 313-336.
    2. Yang, Peifang & Davis, Graham A., 2018. "Non-renewable resource extraction under financial incentives to reduce and reverse stock pollution," Journal of Environmental Economics and Management, Elsevier, vol. 92(C), pages 282-299.
    3. Cairns, Robert D., 2014. "The green paradox of the economics of exhaustible resources," Energy Policy, Elsevier, vol. 65(C), pages 78-85.
    4. Cairns, Robert D. & Calfucura, Enrique, 2012. "OPEC: Market failure or power failure?," Energy Policy, Elsevier, vol. 50(C), pages 570-580.
    5. Zhang, Kuangyuan & Kleit, Andrew N., 2016. "Mining rate optimization considering the stockpiling: A theoretical economics and real option model," Resources Policy, Elsevier, vol. 47(C), pages 87-94.
    6. Cairns, Robert D., 2018. "Stranded oil of Erewhon," Energy Policy, Elsevier, vol. 121(C), pages 248-251.
    7. Robert D. Cairns, 2013. "The fundamental problem of accounting," Canadian Journal of Economics, Canadian Economics Association, vol. 46(2), pages 634-655, May.
    8. Robert D. Cairns and Graham A. Davis, 2015. "Mineral Depletion and the Rules of Resource Dynamics," The Energy Journal, International Association for Energy Economics, vol. 0(Adelman S).
    9. Cairns, Robert D., 2018. "Economic Accounting in the Simple Hotelling Model," Resource and Energy Economics, Elsevier, vol. 51(C), pages 18-27.

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