17 Pages Posted: 7 Dec 2010

Date Written: December 6, 2010

Abstract

In this paper, we provide a model that permits systematic and even quantitative assessment of the policy implications of increasingly scarce and expensive resources. Specifically we model the return to investment as a function of fixed cost, discount rate, uncertainty, project duration and the volume of output. Institutions can be understood as the accumulation of past fixed investments, which lower the variable cost of economic activities but constrain choices open to future policymakers. How much to invest in fixed assets and how institutions respond to a changing environment are the key questions as the cost of nonrenewable resources rises.