Capital reallocation and sustainable growth with ambiguity to disaster risk

Yanming Yao and Yuan Tian

Economic Modelling, 2025, vol. 151, issue C

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.

Keywords: Disaster risk; Ambiguity; Capital reallocation; Sustainable growth; Recursive utility (search for similar items in EconPapers)
JEL-codes: C61 D81 E20 G11 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999325001312
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:151:y:2025:i:c:s0264999325001312

DOI: 10.1016/j.econmod.2025.107136

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().