A note on uncertainty and discounting in models of economic growth |
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Authors: | Kenneth J Arrow |
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Institution: | (1) Department of Economics, Stanford University, Stanford, CA 94305-6072, USA |
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Abstract: | 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.
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Keywords: | Uncertainty Discount rate Intertemporal optimization Relative risk aversion |
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