Sustained positive consumption in a model of stochastic growth: The role of risk aversion
AbstractIn a stochastic economy, long run consumption and output may not be bounded away from zero even when productivity is arbitrarily high near zero and uncertainty is arbitrarily small. In the one-sector stochastic optimal growth model with i.i.d. production shocks, we characterize the nature of preferences that lead to this phenomenon for a stochastic Cobb–Douglas technology. For the general version of the model, we outline sufficient conditions under which the economy expands its capital stock near zero and long run consumption is bounded away from zero with certainty. Our conditions highlight the important role played by risk aversion for small consumption levels.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Theory.
Volume (Year): 147 (2012)
Issue (Month): 2 ()
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Web page: http://www.elsevier.com/locate/inca/622869
Stochastic growth; Sustained consumption; Extinction; Risk aversion;
Other versions of this item:
- Mitra, Tapan & Roy, Santanu, 2010. "Sustained Positive Consumption in a Model of Stochastic Growth: The Role of Risk Aversion," Working Papers 10-03, Cornell University, Center for Analytic Economics.
- D9 - Microeconomics - - Intertemporal Choice
- E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
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