Reconciling Gray and Hotelling

Richard J. Brazee and L. Martin Cloutier

American Journal of Economics and Sociology, 2006, vol. 65, issue 3, 827-856

Abstract: Abstract. Early exhaustible resource economics provides an important foundation for recent suggestions that firm‐level economic modeling plays a larger role in the analysis of resource scarcity. The lack of empirical support for Hotelling’s r‐percent rule, introduced in 1931, and recent suggestions that industry behavior may not be reducible to firm behaviors are the primary motivating factors for examining the relative value of Gray’s contribution to the field of exhaustible resource economics relative to Hotelling’s contribution. Specifically, Gray’s papers that appeared in the 1910s provide insight into the heterogeneity of deposits and their spatial dimensions, and offer the possibility that firms will be subject to fixed costs carried over between periods. In this paper, the arguments presented by Gray are formalized in a dynamic model, which allows the differences between Gray’s and Hotelling’s assumptions to be more fully explored. The results of the paper illustrate that by considering spatially identifiable heterogeneous deposits, fixed costs, and entry costs, in general Hotelling’s r‐percent rule is not a sufficient condition for firm‐level decision making and that firms’ extraction behavior cannot be linearly aggregated to describe industry behavior.

Date: 2006
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