Fiscal Regime Uncertainty, Risk Aversion & Exhaustible Resource Depletion

Over the past decade or so, a good deal of the conceptual work on exhaustible resources has directed some attention to the problem of uncertainty. As Notelling (1931) illustrated early on, even the simplest problems of exhaustible resource management are inherently dynamic. It is thus hardly surprising that an
uncertain future should be a pressing issue, and that its treatment in the literature should yield a number of interesting results. Future additions to resource stocks, technological improvements (including those that make a substitute for the resource in question available, or available more cheaply), demand shifts, and changes in environmental and fiscal legislation are all relevant data about which resource managers
often have little prior knowledge. For concreteness, this paper examines the effects on resource depletion of uncertainty in the industry about future tax liability. The method developed is, however, equally applicable to other types of uncertainty. The treatment is distinguished by its allowance, in a rigorous
manner, for risk aversion on the part of resource-extracting firms.

By: A. Khadr

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