A nearly complete test of a capital accumulating, vertically integrated, nonrenewable resource extracting theory of a competitive firm

A new approach to testing a generalized Hotelling theory of a nonrenewable resource extracting firm is developed. In contrast to approaches extant, it (i) permits empirical testing of all the refutable implications of the theory, (ii) does not require estimates of, or data on, the shadow value of the resource stock, (iii) does not require estimation of the feedback control functions or the necessary conditions associated with the underlying optimal control problem, and (iv) treats the capital stock in a theoretically sound manner in the econometric model. Because of certain limitations in the data, most, but not all, of the refutable implications of the theory are tested using a Bayesian approach. Other limitations in the data mean that the paper is better viewed as an illustration of how one would go about rigorously testing the extended Hotelling theory, rather than as one which presents convincing empirical evidence that supports or refutes it.

► A new approach to testing a generalized Hotelling theory of a nonrenewable resource extracting firm is developed. ► In contrast to approaches extant, it permits empirical testing of all the refutable implications of the theory. ► The new approach does not require estimates of, or data on, the shadow value of the resource stock. ► It also treats the capital stock in a theoretically sound manner in the econometric model. ► Because of certain data limitations, most, but not all, of the refutable implications are tested using a Bayesian approach.