Testing for Non-Jointness in Oil and Gas Exploration: A Variable Profit Function Approach

Abstract

Although the assumption of non-joint production is made in a number of areas of economics, its empirical validity is seldom examined. In this paper, we investigate the hypothesis of non-jointness in the context of a multiple-output production process which utilizes both fixed and variable inputs. Specifically, we test the hypothesis of almost non-jointness in the input quantities and prices, as well as the hypothesis that inputs and outputs are separable, using data on oil and natural gas exploration in Alberta, Canada. To facilitate global tests of these hypotheses we estimate a Generalized Linear-Generalized Leontief variable profit function, both with and without the restrictions implied by nonjointness and by separability. On the basis of likelihood ratio tests, we reject the hypothesis of separability but are unable to reject the non-jointness hypothesis. Based on the maximum likelihood estimates obtained in the non-joint case, we examine some empirical issues concerning oil and gas exploration activity.