Cost Specification and Firm Behaviour in a Hotelling Model of Resource Extraction.

In applied resource economics much attention has been focused.on the ability of the Hotelling model to explain observed firm behavior. In this paper, a preliminary specification search is performed to determine the appropriate cost function parameterization for the firms in the sample before proceeding to the estimation of the Euler equation. Once a cost function specification is chosen, the corresponding Euler equation is estimated via the Generalization Method of Moments (GMM), which allows for better estimates of the Euler equations than in previous studies. Even with the preliminary specification search and the use of GMM estimation, the behavior of the panel of fourteen Canadian copper mining firms in the data set examined does not seem to be consistent with the basic Hotelling model used.