Irreconcilable Differences in Tests of Hotelling’s Theory of Exhaustible Resources

28 Pages Posted: 5 Oct 2009 Last revised: 8 Oct 2009

See all articles by Janie M. Chermak

Janie M. Chermak

University of New Mexico - Department of Economics

Robert H. Patrick

Rutgers University

Date Written: December 21, 2007

Abstract

Empirical tests of the theory of exhaustible resources have provided mixed results regarding empirical validity of the theory. This paper considers differences in the primary testing methodologies and alternative measures of the in situ resource price. We demonstrate that in situ price measures common in the literature are theoretically equivalent for the vertically integrated firm. We also show that empirical shadow price test methodologies imply the same restricted econometric model, while the unrestricted models diverge. We find that the Halvorsen and Smith (1991) test methodology is relatively efficient, and, using data on natural gas wells, reject the unrestricted transition equation of traditional methodology. We conclude that discrepant empirical test results may be an artifact of the econometric testing methodologies rather than a reflection on the validity of the theory.

Keywords: Hotelling, exhaustible resources, scarcity value, econometric tests

JEL Classification: Q30

Suggested Citation

Chermak, Janie M. and Patrick, Robert H., Irreconcilable Differences in Tests of Hotelling’s Theory of Exhaustible Resources (December 21, 2007). Available at SSRN: https://ssrn.com/abstract=1482029 or http://dx.doi.org/10.2139/ssrn.1482029

Janie M. Chermak

University of New Mexico - Department of Economics ( email )

1915 Roma NE/Economics Building
Albuquerque, NM 87131
United States

Robert H. Patrick (Contact Author)

Rutgers University ( email )

Rutgers Business School - Newark and New Brunswick
Department of Finance and Economics
Newark, NJ 07102
United States
(973) 353-5247 (Phone)

HOME PAGE: http://www.rci.rutgers.edu/~rpatrick/hp.html

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