A Modern Validation of Hotelling’s Rule

Abstract

In his seminal 1931 paper, Harold Hotelling demonstrates that in a competitive market for a nonrenewable resource, the price of the resource changes at a rate equal to the interest rate, or to the return on capital. This analysis augments and further justifies Hotelling’s Rule by demonstrating that it holds within a multisector optimization model with human and physical capital, and with both renewable and non-renewable resources. When consumers and producers engage in optimizing behavior, on the margin the net return to physical capital equals the return to harvesting a renewable resource or extracting a nonrenewable resource. Moreover, this analysis reveals that the alleged inconsistencies of Hotelling’s Rule with empirical findings are likely the result of market characteristics specific to each empirical study, not the foundational logic of Hotelling’s rule.