Knightian Uncertainty and Poverty Trap in a Model of Economic Growth
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.
|Date of creation:||Jul 2007|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.cirje.e.u-tokyo.ac.jp/index.html
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kiminori Matsuyama, 1999.
"Growing Through Cycles,"
Econometric Society, vol. 67(2), pages 335-348, March.
- Matsuyama, Kiminori, 1996. "Growing Through Cycles," Economics Series 40, Institute for Advanced Studies.
- Matsuyama, K., 1996. "Growing through cycles," DELTA Working Papers 96-18, DELTA (Ecole normale supérieure).
- Kiminori Matsuyama, 1996. "Growing Through Cycles," Discussion Papers 1203, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Benhabib, Jess & Gali, Jordi, 1995.
"On growth and indeterminacy: some theory and evidence,"
Carnegie-Rochester Conference Series on Public Policy,
Elsevier, vol. 43(1), pages 163-211, December.
- Benhabib, Jess & Gali, Jordi, 1995. "On Growth and Indeterminacy: Some Theory and Evidence," Working Papers 95-08, C.V. Starr Center for Applied Economics, New York University.
- 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.
- 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.
- Peter Howitt & David Mayer-Foulkes, 2002. "R&D, Implementation and Stagnation: A Schumpeterian Theory of Convergence Clubs," NBER Working Papers 9104, National Bureau of Economic Research, Inc.
- 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.
- Acemoglu, Daron & Zilibotti, Fabrizio, 1996. "Was Prometheus Unbound by Chance? Risk, Diversification and Growth," CEPR Discussion Papers 1426, C.E.P.R. Discussion Papers.
- Daron Acemoglu & Fabrizio Zilibotti, 1994. "Was Prometheus unbound by chance? Risk, diversification and growth," Economics Working Papers 98, Department of Economics and Business, Universitat Pompeu Fabra.
- Galor, Oded & Zeira, Joseph, 1993.
"Income Distribution and Macroeconomics,"
Review of Economic Studies,
Wiley Blackwell, vol. 60(1), pages 35-52, January.
- Jess Benhabib & Roger E.A. Farmer, 1992.
"Indeterminacy and Increasing Returns,"
UCLA Economics Working Papers
646, UCLA Department of Economics.
- Benhabib, J. & Farmer, R.E.A, 1991. "Indeterminacy and Increasing Returns," Papers 165, Cambridge - Risk, Information & Quantity Signals.
- Benhabib, Jess & Farmer, Roger E.A., 1991. "Indeterminacy and Increasing Returns," Working Papers 91-59, C.V. Starr Center for Applied Economics, New York University.
- George Evans & Seppo Honkapohja & Paul Romer, 1996.
NBER Working Papers
5659, National Bureau of Economic Research, Inc.
- Durlauf, S.N., 1992.
"A Theory of Persistent Income Inequality,"
47, Stanford - Institute for Thoretical Economics.
- Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March.
- Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1986.
"Assessing Dynamic Efficiency: Theory and Evidence,"
NBER Working Papers
2097, National Bureau of Economic Research, Inc.
- Andrew Abel & Gregory N. Mankiw & Lawrence H. Summers & Richard Zeckhauser, . "Assessing Dynamic Efficiency: Theory and Evidence," Rodney L. White Center for Financial Research Working Papers 14-88, Wharton School Rodney L. White Center for Financial Research.
- 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.
- Mukerji, Sujoy & Tallon, Jean-Marc, 2004. "Ambiguity aversion and the absence of wage indexation," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 653-670, April.
- Jean-Marc Tallon & Sujoy Mukerji, 2004. "Ambiguity aversion and the absence of wage indexation," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00174562, HAL.
- Benabou, Roland, 1996. "Equity and Efficiency in Human Capital Investment: The Local Connection," Review of Economic Studies, Wiley Blackwell, vol. 63(2), pages 237-64, April.
- Kiminori Matsuyama, 1999.
"Growing Through Cycles in an Infinitely -lived Agent Economy,"
1280, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Matsuyama, Kiminori, 2001. "Growing through Cycles in an Infinitely Lived Agent Economy," Journal of Economic Theory, Elsevier, vol. 100(2), pages 220-234, October.
- Steven N. Durlauf, 1991.
"Nonergodic Economic Growth,"
NBER Working Papers
3719, National Bureau of Economic Research, Inc.
- Murphy, Kevin M. & Shleifer, Andrei & Vishny, Robert W., 1989.
"Industrialization and the Big Push,"
3606235, Harvard University Department of Economics.
- 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.
- Galor, O. & Tsiddon, D., 1996. "The Distribution of Human Capital and Economic Growth," Papers 18-96, Tel Aviv - the Sackler Institute of Economic Studies.
- Tsiddon, Daniel, 1992. "A Moral Hazard Trap to Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(2), pages 299-321, May.
- Galor, Oded & Weil, David N, 1996.
"The Gender Gap, Fertility, and Growth,"
American Economic Review,
American Economic Association, vol. 86(3), pages 374-87, June.
- David Schmeidler, 1989.
"Subjective Probability and Expected Utility without Additivity,"
Levine's Working Paper Archive
7662, David K. Levine.
- Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-87, May.
- Brock, William A. & Mirman, Leonard J., 1972. "Optimal economic growth and uncertainty: The discounted case," Journal of Economic Theory, Elsevier, vol. 4(3), pages 479-513, June.
- Azariadis, Costas & Drazen, Allan, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 501-26, May.
When requesting a correction, please mention this item's handle: RePEc:tky:fseres:2007cf502. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CIRJE administrative office)
If references are entirely missing, you can add them using this form.