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Investment and resource policy under a modified Hotelling rule

Bazhanov, Andrei (2011): Investment and resource policy under a modified Hotelling rule.

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Abstract

An extensive literature shows the importance of investment policy for sustainability of resource-based economies by examining the role of investment in current utility change (CUC) for a competitive optimizing economy. This paper extends some of these results by analysing the dependence of CUC on genuine investment, expressed in marginal resource productivity, under dynamic inefficiency. This inefficiency arises when a social planner, due to imperfection in knowledge or in institutions, does not take into account deviations of real economy from a theoretical model. These deviations or distortions, connected with the resource extraction, can influence utility, production, the balance equation, and the dynamics of the reserve, modifying the standard Hotelling rule. The analysis of this natural discrepancy between theory and real life implies that: first, institutional and resource policies in inefficient economies may be more important for CUC than investment policy; and secondly, under uncertainties in production possibilities and in damages from economic activities, sustainability requires a more cautious resource policy than is advised by a theory.

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