Nonrenewable Resources, Strategic Behavior and the Hotelling Rule: An Experiment

Abstract

We use a laboratory experiment to investigate a novel reason for the lack of empirical support for the Hotelling rule for nonrenewable resources. Specifically, we test whether producers with large resource stocks focus less on the dynamic component of their extraction decision, making them shift extraction to the present and focus more on strategic behavior. Exploiting exogenous variation in stock size in a nonrenewable resource duopoly laboratory experiment, we find that producers with large stocks indeed pay significantly less attention to dynamic optimization, and shift extraction to the present, leading them to overproduce relative to the Hotelling rule.

Emissions trading with rolling horizons

“…Sahin et al (2013) for a review. Importantly, they have helped rationalize quantitative puzzles in terms of saving behaviors (Caliendo & Aadland, 2007), social security choices (Findley & Caliendo, 2009), and more in line with our paper, the long-run price dynamics of exhaustible resources such as oil (Spiro, 2014;van Veldhuizen & Sonnemans, 2018). In the latter context, a rolling horizon suppresses long-term scarcity considerations when the resource stock is sufficiently large so that the dynamic nature of the problem vanishes and resource extraction does not conform to Hotelling's rule.…”

“…Easley & Spulber, 1981;Grüne et al, 2015). Additionally, rolling planning is extensively used by firms in their routine production and supply management procedures (see Sahin et al (2013) for a review) and has been applied in a similar context -exhaustible resource extraction -to help rationalize the lack of empirical support for the Hotelling rule (Spiro, 2014;van Veldhuizen & Sonnemans, 2018). 3 As another source of bounded rationality, we consider that firms may face cognitive or computational limitations in optimally adjusting their decisions in response to supply control.…”

Collusion and predation under Cournot competition

“…Indeed, our model predicts monopolization for high discount factors, collusion for intermediate ones, and Cournot–Nash equilibria for low discount factors. The discount factor of firms is a mapping of several firm‐specific, industry‐specific, and time‐specific variables, but the available stock of oil constitutes a crucial determinant in the context of the oil industry as hypothesized and empirically supported by previous research establishing that the discount factor is a negative function of the available (known) stock of resources (Laibson, 1997; O'Donoghue & Rabin, 1999; van Veldhuizen & Sonnemans, 2018). In other words, as the relative availability of oil stocks has been increasing through time with the recurrent discovery of new oil fields (Auzanneau, 2015), it is fair to conjecture that the firms' discount factors have been contracting though time, thence resulting in monopolization practices, followed by collusion, and eventually Cournot–Nash competition.…”

Non-Renewable Resources and Sustainable Resource Extraction: An Empirical Test of the Hotelling Rule’s Significance to Gold Extraction in South Africa

“…Eventually, the price would be so high that demand would be eliminated altogether. The basic message of Hotelling's Rule is that the profitable extraction path, both socially and economically, is one in which the price of the non-renewable resource increases at the same rate as the interest rate [10][11][12]. Hotelling's Rule is a necessary efficiency condition that must be satisfied by any optimal extraction programme.…”