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Strike When the Force Is with You: Optimal Stopping with Application to Resource Equilibria

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  • Graham A. Davis

Abstract

Optimal investment in a nonrenewable resource project occurs when the rate of increase of the project's forward value falls to the force of interest. This stopping rule yields a financial interpretation of resource quality as being a property of the project rather than of individual units of reserves. It also leads to re-interpretations of (a) rent as the present value of the project rather than of units of reserves and (b) Hotelling's insight as, not a rule for the path of rents, but an equilibrium algorithm for price. The analysis is extended to sequential development of pesticides, antibiotics, and forests. Copyright 2007, Oxford University Press.

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  • Graham A. Davis, 2007. "Strike When the Force Is with You: Optimal Stopping with Application to Resource Equilibria," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(2), pages 461-472.
    • Handle: RePEc:oup:ajagec:v:89:y:2007:i:2:p:461-472
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    File URL: http://hdl.handle.net/10.1111/j.1467-8276.2007.01016.x
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    Cited by:

    1. Cairns, Robert D., 2014. "The green paradox of the economics of exhaustible resources," Energy Policy, Elsevier, vol. 65(C), pages 78-85.
    2. Anthony J. Venables, 2014. "Depletion and Development: Natural Resource Supply with Endogenous Field Opening," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 1(3), pages 313-336.
    3. Cairns, Robert D. & Calfucura, Enrique, 2012. "OPEC: Market failure or power failure?," Energy Policy, Elsevier, vol. 50(C), pages 570-580.
    4. Zhang, Kuangyuan & Kleit, Andrew N., 2016. "Mining rate optimization considering the stockpiling: A theoretical economics and real option model," Resources Policy, Elsevier, vol. 47(C), pages 87-94.
    5. Robert D. Cairns, 2009. "Green Accounting for Black Gold," The Energy Journal, , vol. 30(4), pages 113-140, October.
    6. Cairns, Robert D., 2018. "Stranded oil of Erewhon," Energy Policy, Elsevier, vol. 121(C), pages 248-251.
    7. Robert D. Cairns, 2013. "The fundamental problem of accounting," Canadian Journal of Economics, Canadian Economics Association, vol. 46(2), pages 634-655, May.
    8. Robert D. Cairns & Graham A. Davis, 2015. "Mineral Depletion and the Rules of Resource Dynamics," The Energy Journal, , vol. 36(1_suppl), pages 159-178, June.
    9. Cairns, Robert D., 2018. "Economic Accounting in the Simple Hotelling Model," Resource and Energy Economics, Elsevier, vol. 51(C), pages 18-27.
    10. Yang, Peifang & Davis, Graham A., 2018. "Non-renewable resource extraction under financial incentives to reduce and reverse stock pollution," Journal of Environmental Economics and Management, Elsevier, vol. 92(C), pages 282-299.

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