Modeling the Expansion of Oil Production in South Texas and Mexico

David Hudgins and Jim Lee

The International Trade Journal, 2016, vol. 30, issue 5, 387-414

Abstract: This study develops a dynamic output adjustment model that characterizes the expansion of U.S. oil production firms into Mexico. Using a Cobb-Douglas framework that differentiates U.S. and Mexican plants, we derive the comparative, static, risk-free, dual-country production levels for the multinational operations in each of the two countries when there are no capital constraints and perfect information. Given capital and labor constraints on Mexican production, the article uses an optimal control framework to derive the optimal production levels over time during a fixed adjustment period. This provides a pragmatic strategy for planning a growth path for investment in foreign operations.

Date: 2016
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DOI: 10.1080/08853908.2016.1204965

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