The Theory of Exhaustible Resources: What are the Econometric Methods Testing?

Abstract

Empirical tests of the theory of exhaustible resources have come to conflicting conclusions concerning the validity of the theory to exhaustible resources to explain owners’ production decisions. This paper develops the theoretical framework, alternative measures of the unobservable in situ resource price, and evaluates the potential impacts of processing of the resource on the test results, as well as those of incomplete data and/or information. We evaluate the consistency of the two commonly used test methodologies and the impacts on results of alternative measures of the unobservable in situ resource price. We show how, all else equal, the tests methodologies diverge; as a result, the possibility of discrepant results should not be a surprise. In regards to the impacts of processing, data and information, we find the potential for inaccuracy in the estimate of the in situ resource price, which may result in biased test results.