A note on uncertainty and discounting in models of economic growth
- 348 Downloads
The implications of uncertainty for appropriate discounting in models of economic growth have been studied at some length, notably, (Review of Economic Studies, 36:153–163; 1969) and (Journal of Public Economics, 85:149–166; 2002). A detailed account has now appeared in Journal of Risk and Uncertainty, 37:141–169; 2008, sections 4 and 5 (pp. 160–166). One interesting, if perhaps minor, aspect is that under certain circumstances, there appeared to be no solution or at least no satisfactory one. More importantly, the formulas are usually given for the log normal case and are somewhat complicated and hard to interpret intuitively. I show here that assuming a general distribution for returns to capital gives simpler and more understandable results.
KeywordsUncertainty Discount rate Intertemporal optimization Relative risk aversion
JELC61 D9 H43 O41
Preparation of this study was made possible by a grant from the William and Flora Hewlett Foundation. I am indebted for many discussions with Partha Dasgupta on the role of uncertainty in climate change problems.
- Bernoulli, D. (1738). Specimen theoriae novae de mensura sortis. Comentarii academiae scientiararum imperialis Petropolitanae, 5, 175–192; translated as, (1954). Exposition of a new theory on the measurement of risk, Econometrica, 22, 23–36.Google Scholar
- Weitzman, M. L. (forthcoming). On models of interpreting the economics of catastrophic climate change. Review of Economics and Statistics.Google Scholar