Controlling Stocks and Flows to Promote Quality: The Environment, with Applications to Physical and Human Capital

49 Pages Posted: 2 Jun 2000 Last revised: 14 Aug 2022

See all articles by Nathaniel O. Keohane

Nathaniel O. Keohane

Yale University - School of Management

Benjamin Van Roy

Stanford University - Department of Management Science & Engineering

Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Date Written: June 2000

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.

Suggested Citation

Keohane, Nathaniel O. and Van Roy, Benjamin and Zeckhauser, Richard J., Controlling Stocks and Flows to Promote Quality: The Environment, with Applications to Physical and Human Capital (June 2000). NBER Working Paper No. w7727, Available at SSRN: https://ssrn.com/abstract=231187

Nathaniel O. Keohane

Yale University - School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
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Benjamin Van Roy

Stanford University - Department of Management Science & Engineering ( email )

473 Via Ortega
Stanford, CA 94305-9025
United States

Richard J. Zeckhauser (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-495-1174 (Phone)
617-384-9340 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-495-1174 (Phone)
617-496-3783 (Fax)

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