TITLE:
A Modern Validation of Hotelling’s Rule
AUTHORS:
Francis E. Raymond
KEYWORDS:
Endogenous Growth, Hotelling’s Rule, Human Capital, Nonrenewable Resources, Renewable Resources
JOURNAL NAME:
Theoretical Economics Letters,
Vol.7 No.7,
December
8,
2017
ABSTRACT: In his seminal 1931 paper, Harold Hotelling
demonstrates that in a competitive market for a nonrenewable resource, the
price of the resource changes at a rate equal to the interest rate, or to the
return on capital. This analysis augments and further justifies Hotelling’s
Rule by demonstrating that it holds within a multisector optimization model
with human and physical capital, and with both renewable and non-renewable
resources. When consumers and producers engage in optimizing behavior, on the
margin the net return to physical capital equals the return to harvesting a
renewable resource or extracting a nonrenewable resource. Moreover, this
analysis reveals that the alleged inconsistencies of Hotelling’s Rule with
empirical findings are likely the result of market characteristics specific to
each empirical study, not the foundational logic of Hotelling’s rule.