Endogenous growth with a limited fossil fuel extraction capacity

Campbell (1980) and following authors have discussed a limited resource extraction capacity as an augmentation of the well-known Hotelling model. We integrate a limited extraction capacity and related investments in the endogenous growth model of Tsur and Zemel (2005) to study its effect on economic development. The capacity constraint gives rise to three effects. On the one hand, higher energy costs and the reallocation of production towards capacity investments decrease production available for consumption, research and/or capital investments (energy costs and reallocation effect). On the other hand, research investments may increase, which boosts available production (research effect). Depending on the capital endowment and the strength of the effects, long-run consumption may be boosted or depressed. In particular, the capacity constraint may render everlasting consumption growth non-optimal in a resource-rich economy. Furthermore, we find that capacity investments may be postponed to later points in time if the capital endowment is high.