Two-stage modeling of resource owner behaviour

Abstract

This paper examines the dynamic behaviour of mining firms in the context of a two-stage Hotelling model of resource extraction. Initially, the model is described and the corresponding set of Hotelling conditions (Euler equations) are derived. This model is then applied to a set of data pertaining to a panel of 14 Canadian copper mining firms. A multiplicatively separable cost function specification is chosen and is estimated (i) in isolation from and (ii) in conjunction with the Euler equations. In both cases it is found that there are inconsistencies between the estimated parameters and the underlying model. These discrepancies are more pronounced when the entire system of equations is estimated. The Euler equations and cost function are estimated via the Generalized Method of Moments. This is an improvement over previous tests of dynamic efficiency in that it allows for direct estimation of the Hotelling conditions