WEAI/AERE 2009 - Individual Paper Abstract
Title: Optimal Domestic Processing of Exhaustible Resource Exports under Stock Uncertainty
Author(s): Ramesh C. Kumar, Department of Economics, University of Waterloo, 200 University Avenue West, Waterloo, ON, N2l 3G1, Canada, rkumar@uwaterloo.ca (photo credit: via Ramesh Kumar)
Abstract:
The ever-increasing integration of the world economy through international trade and investment has not diminished the attractiveness of greater domestic processing of exhaustible natural resource exports among policy-makers in developing countries. The existing analysis and results underpinning its economic rationale, however, pertain generally to the case when the size of the initial resource stock is known with perfect certainty. Expressing resource stock uncertainty via the hazard function, we examine the robustness of the existing results for a small open economy. In addition to fully extending the major existing results with minimal additional assumptions to the uncertainty scenario for a wide class of iso-elastic utility function and continuous resource stock distributions with finite support, the paper furnishes a complete qualitative characterization of the optimal program in terms of the extraction rate, the level of domestic processing and capacity expansion.