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A Note on Uncertainty and Discounting in Models of Economic Growth

  • Kenneth Arrow

    ()

    (Stanford University)

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://www-siepr.stanford.edu/repec/sip/08-017.pdf
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Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 08-017.

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Date of creation: Jan 2009
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Handle: RePEc:sip:dpaper:08-017
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  1. GOLLIER Christian, 2008. "Discounting with fat-tailed economic growth," LERNA Working Papers 08.19.263, LERNA, University of Toulouse.
  2. Levhari, David & Srinivasan, T N, 1969. "Optimal Savings under Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 36(106), pages 153-63, April.
  3. Partha Dasgupta, 2008. "Discounting climate change," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 141-169, December.
  4. Gollier, Christian, 2002. "Discounting an uncertain future," Journal of Public Economics, Elsevier, vol. 85(2), pages 149-166, August.
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