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If You Only Have a Hammer: Optimal Dynamic Prevention Policy

Author

Listed:
  • Christopher Rauh
  • Ben Seimon
  • Alessandro Ruggieri
  • Hannes Mueller

Abstract

We study the gains of improving forecasting when a policymaker is facing a recurring risk and has the choice between a preventive early action and a de-escalating late action. We first introduce a simple two-stage Markov model to illustrate how prevention and de-escalation interact. We then study the role of forecasting for optimal armed conflict prevention in a 12-stage model which is calibrated using a large cross-country panel. Prevention benefits are substantial but critically depend on the systematic use of forecasting. The information rent of using a forecast is larger than 60% of GDP. In line with the theory we find that de-escalation policies reduce the incentives for prevention, whereas prevention increases incentives for de-escalation.

Suggested Citation

  • Christopher Rauh & Ben Seimon & Alessandro Ruggieri & Hannes Mueller, 2024. "If You Only Have a Hammer: Optimal Dynamic Prevention Policy," Working Papers 1465, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:1465
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    References listed on IDEAS

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    6. Alan J. Auerbach & Yuriy Gorodnichenko, 2013. "Corrigendum: Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 5(3), pages 320-322, August.
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    Keywords

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    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • F5 - International Economics - - International Relations, National Security, and International Political Economy
    • F1 - International Economics - - Trade
    • L8 - Industrial Organization - - Industry Studies: Services

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