Stochastic Cost Benefit Rules: A Back-of-a-Lottery-Ticket Calculation Method

Thomas Aronsson (), Löfgren, Karl-Gustaf () and Kaj Nyström ()
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Thomas Aronsson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Löfgren, Karl-Gustaf: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Kaj Nyström: Department of Mathematics, Postal: Umeå University, S 901 87 Umeå, Sweden

No 606, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: In this paper, we introduce cost benefit rules for projects embedded in a stochastic optimal growth framework. We model uncertainty in terms of Brownian motion and Ito integrals. Taking the mathematical expectation of the project means that the Ito integrals vanish, and we end up with a cost benefit rule that closely resembles its deterministic counterpart.

Keywords: Cost benefit analysis; stochastic optimal control theory; Brownian motion (search for similar items in EconPapers)
JEL-codes: C60 D61 D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic
Date: 2003-03-26
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