Geological influences, metal prices and rationality

Abstract

Much empirical work has been performed to test the predictions of Hotelling-style models of non-renewable resource production. Disparate, seemingly contradictory results have emerged, some damaging to the predictions of rational models of present value maximization. This paper presents a theoretical model of mining which incorporates the facts that varying qualities of material must be extracted at any time from a deposit, so that a cut-off grade must be determined, and that the extractive sector is embedded in an economy with more than one sector. The model reconciles many of the disparate findings from a rationalist, Hotelling perspective. Empirical results for Canadian gold mining are consistent with the theoretical predictions.