Perverse supply response in the Liberian mining sector

Under neoclassical assumptions, and the usual ceteris paribus stipulations, a profit maximizing firm is expected to increase production in response to rising prices. These situations normally produce the rather well-known upward sloping supply curve for the firm which can usually be generalized to the industry. This paper examines whether these situations held for firms in the iron ore mining sector in Liberia between 1951 and 1985 under a system where royalties were levied on the per unit level of production and on the basis of the price of the ore. It investigates whether iron ore mining companies have an incentive to increase ore production when prices are low to attract lower total royalty payments under conditions where: (a) base-mining operations are vertically integrated and firms employ transfer pricing between mining and upstream processing entities and (b) large quantities of ore can be shipped at relatively low prices and held in inventory either as ore or added-value products, such as steel, to take advantage of higher prices in the future. The paper specifies and estimates two simple linear supply models of the Liberian iron ore industry. It uses data for 1951-1985, the period for which the most consistent and reliable data exist prior to the start of the 14-year conflict in 1989. The analysis finds that the price coefficient estimates from both models are robust but negative and suggest that a perverse response in the supply behavior of mining companies in Liberia over the period 1951-1985 cannot be ruled out.