Computational Methods in Natural Resource Economics: Agent-Based Modeling and Hotelling's Rule

This dissertation presents a prototype model and methodology for validating a simpleagent-based model against the basic Hotelling monopoly model and a few basic extensions.Hotelling's Rule identi es the expected behavior of a market for a nonrenewable resource.The statement is simple - marginal profit will increase at the prevailing rate of interest - butthe implications are far-reaching and not broadly understood. Agent-based modeling is acomputer modeling and simulation methodology. It has its origins in biology and physics,but has become a powerful tool in the social sciences for examining systems in which thewell-understood behaviors of individuals result in unanticipated outcomes.Validation of the basic Hotelling monopoly model is a necessary step in wider acceptanceof agent-based modeling as a predictive and analytical tool in natural resource economics.An agent-based model is a valid predictive tool if, given rules to express preferences, it ispossible to predict the large-scale outcomes of the choices made by individuals over time. Anagent-based model is a valid analytical tool if it provides a means to explore the behaviorsthat lead to known results, much like nonlinear regression.This simple agent-based model is found to be valid for the basic Hotelling monopolymodel. The agent-based model is validated with caveats for the Hotelling monopoly modelwith extensions to include basic production technologies. The caveats are based on smalldeviations, the magnitudes of which depend on the specific form of costs associated with aproduction technology. It is argued that those deviations are not unlike the deviations thata human would make.An extension of the Hotelling monopoly model to a small oligopoly exhibits emergentcooperation-like properties, despite the absence of explicit interagent communication. Dependingon the number of producers and the initial distribution of resource stocks, thebehavior is either collusion-like or Cournot-like. The Cournot-like outcome occurs whenonly some of the producers lower production, resulting in a rise in the market price, whichcauses the other producers to experience a Hotelling's Rule increase in marginal profit withoutreducing their own production. This continues at each time step, so that the latterproducers maintain a constant, higher production level while the others continue to decreaseproduction.The outcomes of the agent-based models are reassessed with the costs previously arisingfrom production technologies replaced by taxes associated with fiscal policies. Each fiscalregime is evaluated in terms of its efficacy and the unintended consequences of the policy. Thepolicy goals examined are preservation for future generations, internalization of externalities(Pigouvian taxation), and revenue generation. This comparison uses data from the agent-basedmodels, examining agent error as one of the unintended consequences of fiscal policy.The basics of agent-based modeling are presented. This methodology is suited to problemsin which the immediate preferences of the agents can be stated as equations or rulesbut complexity in their interactions with the environment or each other make predicting theoutcomes difficult.