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Knightian Uncertainty and Poverty Trap in a Model of Economic Growth

  • Shin-ichi Fukuda

    (Faculty of Economics, University of Tokyo)

This paper explores how Knightian uncertainty affects dynamic properties in a model of economic growth. The decision-making theory in the analysis is that of expected utility under a non-additive probability measure, that is, the Choquet expected utility model of preference. We apply this decision theory to an overlapping-generations model where producers face uncertainty in their technologies. When the producer has aversion to uncertainty, the firm's profit function may not be differentiable. The firm's decision to invest and hire labor therefore becomes rigid for some measurable rage of real interest rate. In the dynamic equilibrium, the existence of the firm level rigidity causes discontinuity in the wage function, which makes multiple equilibria more likely outcome under log utility and Cobb-Douglass production functions. We show that even if aversion to uncertainty is small, "poverty trap" can arise for a wide range of parameter values.

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File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2007/2007cf502.pdf
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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-502.

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Length: 29 pages
Date of creation: Jul 2007
Date of revision:
Handle: RePEc:tky:fseres:2007cf502
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  1. Galor, Oded & Tsiddon, Daniel, 1997. " The Distribution of Human Capital and Economic Growth," Journal of Economic Growth, Springer, vol. 2(1), pages 93-124, March.
  2. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 35-52, January.
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  9. Acemoglu, Daron & Zilibotti, Fabrizio, 1997. "Was Prometheus Unbound by Chance? Risk, Diversification, and Growth," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 709-51, August.
  10. Jess Benhabib & Roger E.A. Farmer, 1992. "Indeterminacy and Increasing Returns," UCLA Economics Working Papers 646, UCLA Department of Economics.
  11. Sujoy Mukerji & Jean-Marc Tallon, 2002. "Ambiguity Aversion and the Absence of Wage Indexation," Economics Series Working Papers 111, University of Oxford, Department of Economics.
  12. Robert J. Barro & Gary S. Becker, . "Fertility Choice in a Model of Economic Growth," University of Chicago - Population Research Center 88-8, Chicago - Population Research Center.
  13. Howitt, Peter & Mayer-Foulkes, David, 2005. "R&D, Implementation, and Stagnation: A Schumpeterian Theory of Convergence Clubs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(1), pages 147-77, February.
  14. Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March.
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  16. Matsuyama, Kiminori, 1996. "Growing Through Cycles," Economics Series 40, Institute for Advanced Studies.
  17. Steven N. Durlauf, 1991. "Nonergodic Economic Growth," NBER Working Papers 3719, National Bureau of Economic Research, Inc.
  18. Oded Galor & David N. Weil, 1993. "The Gender Gap, Fertility, and Growth," NBER Working Papers 4550, National Bureau of Economic Research, Inc.
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