Denise Young

Cost Specification and Firm Behaviour in a Hotelling Model of Resource Extraction

In applied resource economics much attention has been focused.on the ability of the Hotelling model to explain observed firm behavior. In this paper, a preliminary specification search is performed to determine the appropriate cost function parameterization for the firms in the sample before proceeding to the estimation of the Euler equation. Once a cost function specification is chosen, the corresponding Euler equation is estimated via the Generalization Method of Moments (GMM), which allows for better estimates of the Euler equations than in previous studies. Even with the preliminary specification search and the use of GMM estimation, the behavior of the panel of fourteen Canadian copper mining firms in the data set examined does not seem to be consistent with the basic Hotelling model used.

Empirical testing of a risk-adjusted Hotelling model

Abstract The Hotelling model of the optimal depletion of an exhaustible resource specifies that in a world without risk, equilibrium rates of return on nonrenewable resource assets and on alternative assets will be equalized. In applied work, where the rate of return on the resource asset is typically measured as the rate of increase of marginal profits while the return on the alternative asset is measured by a market rate of interest, the Hotelling model has not, in general, held up well to empirical scrutiny. In the recent literature, the Hotelling model has been reconsidered in the context of a world where risk is present. In such a context, the expected rates of return on an exhaustible resource and on other assets will not necessarily be equalized in equilibrium. In fact, unless agents are risk neutral, the relative riskiness of the resource asset will play a crucial role in a ‘risk-adjusted’ Hotelling rule. Specifically, with competitive firms, the expected rate of return on an exhaustible resource will differ from the expected rate of return on alternative assets by the risk premium associated with the resource asset. In this paper we investigate how well this ‘risk-adjusted’ Hotelling model withstands empirical scrutiny. Given the role of expectations in this modified Hotelling rule and in the Euler equations that yield this rule, we use Generalized Method of Moments (GMM) estimation in our empirical analysis. Our application, which is based on three different utility specifications, examines returns for various resource industries (lead, zinc, copper, silver), utilizing aggregate annual Canadian price, extraction cost, and interest rate data since 1950.

Productivity and metal mining: evidence from copper-mining firms

One of the aims of productivity measurement is to assess the performance of various sectors of the economy with respect to their use of scarce inputs. In this paper the emphasis is on the effects of firm behaviour on simple index number measurement of total factor productivity in non-renewable resource industries. Economic theory predicts that when the stock of ore is known and there is positive discount rate, an intertemporally profit-maximizing firm will often process the ‘best’ ore first. That is, ores that are of high grade and/or are most easily accessible will be correspond to the lowest-cost units of final metal output. Less capital, labour, energy and matgerials will be needed in the mining and milling processes.