Working Paper: NBER ID: w7727
Authors: Nathaniel O. Keohane; Benjamin Van Roy; Richard J. Zeckhauser
Abstract: Our analysis melds two traditional approaches to promoting quality. The first is restoring the stock of quality. The second is curbing its flow of deterioration. Although both approaches are widely used in real world settings, analytic models have tended to focus on one strategy or the other. We consider a class of problems, which we call SFQ' problems, in which both stocks and flows can be controlled to promote quality. We develop our results in the context of environmental quality, drawing on real-world examples from atomic wastes to zebra mussels. But the lessons are general, and we show how they apply to promoting the quality of both physical and human capital. We first study optimal policies in the limiting cases when only abatement or restoration is possible. We then focus on the full SFQ world, where both approaches can be used. We show that the optimal policy employs both instruments. Moreover, when combined optimally, neither strategy takes the form it would in the absence of the other.
Keywords: No keywords provided
JEL Codes: C61; E22; Q20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Restoring the stock of quality (L15) | Overall quality (L15) |
| Curbing its flow of deterioration (Q25) | Overall quality (L15) |
| Controlling both strategies (L21) | Overall quality (L15) |
| Combination of strategies leads to optimal outcomes (L21) | Overall quality (L15) |
| Optimal policy employs both instruments (E63) | Overall quality (L15) |