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A note on uncertainty and discounting in models of economic growth

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  • Kenneth Arrow

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Abstract

The implications of uncertainty for appropriate discounting in models of economic growth have been studied at some length, notably, Levhari and Srinivasan (1969), Gollier (2002). A detailed account has now appeared in Dasgupta (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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File URL: http://hdl.handle.net/10.1007/s11166-009-9065-1
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Bibliographic Info

Article provided by Springer in its journal Journal of Risk and Uncertainty.

Volume (Year): 38 (2009)
Issue (Month): 2 (April)
Pages: 87-94

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Handle: RePEc:kap:jrisku:v:38:y:2009:i:2:p:87-94

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Web page: http://www.springerlink.com/link.asp?id=100299

Related research

Keywords: Uncertainty; Discount rate; Intertemporal optimization; Relative risk aversion; C61; D9; H43; O41;

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References

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  1. Partha Dasgupta, 2008. "Discounting climate change," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 141-169, December.
  2. GOLLIER Christian, 2008. "Discounting with fat-tailed economic growth," LERNA Working Papers 08.19.263, LERNA, University of Toulouse.
  3. Levhari, David & Srinivasan, T N, 1969. "Optimal Savings under Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 36(106), pages 153-63, April.
  4. Gollier, Christian, 2002. "Discounting an uncertain future," Journal of Public Economics, Elsevier, vol. 85(2), pages 149-166, August.
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Cited by:
  1. Nævdal, Erik & Vislie, Jon, 2012. "Resource Depletion and Capital Accumulation under Catastrophic Risk: The Role of Stochastic Thresholds and Stock Pollution," Memorandum 24/2012, Oslo University, Department of Economics.
  2. Barrett, Scott, 2013. "Climate treaties and approaching catastrophes," Journal of Environmental Economics and Management, Elsevier, vol. 66(2), pages 235-250.
  3. David McInerney & Robert Lempert & Klaus Keller, 2012. "What are robust strategies in the face of uncertain climate threshold responses?," Climatic Change, Springer, vol. 112(3), pages 547-568, June.
  4. Antony Millner, 2013. "On Welfare Frameworks and Catastrophic Climate Risks," CESifo Working Paper Series 4442, CESifo Group Munich.
  5. In Chang Hwang & Richard S.J. Tol & Marjan W. Hofkes, 2013. "Tail-effect and the Role of Greenhouse Gas Emissions Control," Working Paper Series 6613, Department of Economics, University of Sussex.
  6. Nævdal, Eric & Vislie, Jon, 2013. "Resource Depletion and Capital Accumulation under Catastrophic Risk: Policy Actions against Stochastic Thresholds and Stock Pollution," Memorandum 24/2013, Oslo University, Department of Economics.
  7. Partha Dasgupta, 2011. "The Ethics of Intergenerational Distribution: Reply and Response to John E. Roemer," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 50(4), pages 475-493, December.

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