Testing the Assumptions and Predictions of the Hotelling Model

Abstract

In this paper, we empirically examine whether the assumptions and predictions of the Hotelling model are consistent with patterns observed in data. We consider nonlinear functional forms for the extraction cost and resource demand to develop an empirical Hotelling model with technological progress and stock dependent extraction costs. Using panel data on fourteen nonrenewable natural resources to estimate this empirical Hotelling model, we get qualitatively different results as compared to the related literature. We find evidence of stock-dependent extraction costs for most resources. There is no evidence against the linearity of the optimal extraction rate in the resource stock for almost all resources studied. Furthermore, the Hotelling model may sustain a zero long-run growth rate in resource prices. These results depend on whether firms use different extractive technologies or whether the structural break observed on resource prices is taken into account.

Determinants of biopharmaceutical R&D expenditures in China: the impact of spatiotemporal context

“…To pursue profit maximization, the result of the competition is that each company tends to concentrate on the market center, namely the principle of minimum differentiation (Hotelling, 1929;Iskakov & Pavlov, 2009). The Hotelling model deals with the competition between the points on the line, which connotes a linear competition (Atewamba & Nkuiya, 2017). However, in reality, many enterprises conduct dynamic competition on a spatial plane, thus it is necessary to extend this model to the spatial plane, such as discussing the conditions for obtaining Hotelling equilibrium in a circular space (Hayashi & Tsuge, 2019).…”

Taxation of Economic Rents

“…As technology progresses more and more, resources can be acquired (Hart, ). As a consequence, tests of the Hotelling model are typically rejected (Halvorsen and Smith, ; Lin and Wagner, ; Atewamba and Nkuiya, ).…”

“…As technology progresses more and more, resources can be acquired (Hart, 2016). As a consequence, tests of the Hotelling model are typically rejected (Halvorsen and Smith, 1991;Lin and Wagner, 2007;Atewamba and Nkuiya, 2017). Ellis and Halvorsen (2002) find that the difference between the price and the marginal cost of resources is mostly due to market power rather than scarcity rents.…”

The Hotelling rule in non‐renewable resource economics: A reassessment

“…Slade and Thille (), reviewing roughly the same studies, concluded for the rejection of the basic model by data. Further empirical tests, of specific aspects of Hotelling's model, or of elementary extensions of the basic model, reached the same conclusion (e.g., Hart and Spiro , Gaugler , Atewamba and Nkuiya , Karp ).…”