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Reconciling Hotelling - Hossein Hosseini

Date & Time:
August 12, 2015 | 12:00 pm - 1:00 pm
SS 423
Hossein Hosseini

ABSTRACT:  Hotelling’s exhaustible resource theory predicts falling exhaustible resource production and rising exhaustible resource prices. But empirical evidence show that the opposite has been true for most minerals over the past century. We reconcile these facts with a theory of an exhaustible resource economy in which resources are essential to production, but in which biased endogenous technological change occurs. R&D may be targeted either upstream, making labor and the resource stock more productive in producing raw materials, or downstream, making labor and raw materials more productive in producing a final good. We show that while no balanced growth path exists, the transition dynamics have an initial phase which is consistent with rising production and falling prices. While exhaustible resource production eventually falls, in contrast to most Hotelling models, all along the equilibrium path exhaustible resource prices fall relative to wages. Finally, we find that sustained per capita consumption growth is possible. 

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