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

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.