Charles Upton

A test of the Hotelling Valuation Principle

Time-series tests of the Hotelling r-percent rule for natural resource prices have not been strongly supportive, but the tests and the data are subject to serious difficulties. We propose here an alternative testing strategy based on another but less widely known implication of the Hotelling model. We test this implication, which we call the Hotelling Valuation Principle, by regressing the market values of the reserves of a sample of U.S. domestic oiland gas-producing companies on their estimated Hotelling values. We find that the estimated Hotelling values account for a significant portion of the observed variations in market values and that the Hotelling measures are better indicators of the market values of petroleum properties than two widely cited publicly available alternative appraisals.

An equilibrium model of city size

Abstract This paper develops an equilibrium model of city size in which population distribution, real prices, and real wages are determined. Two possible modifications are considered, one involving externalities. The partial equilibrium changes resulting from these modifications are derived and seen to be quite different from the general equilibrium changes. Finally, the paper suggests that site-specific factors of production must be introduced into any consistent model of city size.

LEASING, BUYING, AND THE COST OF CAPITAL SERVICES

Publisher Summary This chapter discusses the concept of leasing, buying, and the cost of capital services. The contrast between the economists and the accountants approach to the problems of corporate decision making is nowhere better illustrated than in the lease-or-buy decision. A neoclassical economist would take it for granted that the rental terms offered by lessors would reflect the inescapable financial costs of owning durable capital goods—interest and depreciation. The choice between renting and buying for any firm depends on which method of acquiring the services of capital goods had the lower nonfinancial costs in the sense of the costs of acquisition, maintenance, and disposal. There are some reason to believe that the balance of these nonfinancial costs tend to favor leasing by user firms. In the chapter, the discussions are focused on such issues as: (1) the nature of the risks of leasing versus those of ownership, (2) the appropriate risk and tax adjustments to apply to the rates used to discount the various relevant cash flows, and (3) the assumptions about financing that should be made to avoid biasing the decision in one direction or the other.