Friedman Extends Hotelling
By Bryan Caplan
David Friedman re-explains Hotelling’s analysis of natural resources, then argues that – due to insecure property rights – Hotelling’s rule underestimates how fast prices will rise:
Suppose I own underground oil, but I believe there is a substantial chance, say ten percent each year, that someone else will seize control over it. I will only leave the oil in the ground if the expected rise in oil prices is enough to compensate me not only for the interest I could have earned on the money I would get by selling the oil now but also for the risk of losing the oil. So insecure property rights result in producing more oil now, less later, and a price pattern that rises faster than in the Hotelling model.
Essentially all property rights in underground oil are insecure. It has surely occurred to the current rulers of Kuwait and Saudi Arabia that money in a Swiss bank account is a safer asset than oil under the desert. The government of Norway is unlikely to fall to a coup or an invasion—but the politicians who control it today cannot be confident of controlling it ten years from now, so have an incentive to pump now and use the money to maintain their political power.
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