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Capital reallocation and sustainable growth with ambiguity to disaster risk

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  • Yao, Yanming
  • Tian, Yuan

Abstract

We formulate a two-sector general equilibrium model that incorporates capital reallocation and ambiguity aversion to disaster risk under recursive utility. We demonstrate how capital distribution between green and brown sectors influences endogenous investment, growth rate, risk-free rate, and uncertainty premium. Moreover, we reveal that ambiguity aversion to disaster risk accelerates capital reallocation, thus explaining the rapid green transformation during the ambiguous circumstances. Furthermore, we find that although the marginal growth rate associated with capital reallocation decreases at the sectoral level, it increases at the aggregate level, implying that capital reallocation contributes to sustainable growth. Our findings also reveal that the disaster uncertainty premium, comprising disaster risk premium and ambiguity premium, is additive even though the utility is not.

Suggested Citation

  • Yao, Yanming & Tian, Yuan, 2025. "Capital reallocation and sustainable growth with ambiguity to disaster risk," Economic Modelling, Elsevier, vol. 151(C).
    • Handle: RePEc:eee:ecmode:v:151:y:2025:i:c:s0264999325001312
    DOI: 10.1016/j.econmod.2025.107136
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    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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