Sustained positive consumption in a model of stochastic growth: The role of risk aversion

Tapan Mitra and Santanu Roy

Journal of Economic Theory, 2012, vol. 147, issue 2, 850-880

Abstract: In a stochastic economy, long run consumption and output may not be bounded away from zero even when productivity is arbitrarily high near zero and uncertainty is arbitrarily small. In the one-sector stochastic optimal growth model with i.i.d. production shocks, we characterize the nature of preferences that lead to this phenomenon for a stochastic Cobb–Douglas technology. For the general version of the model, we outline sufficient conditions under which the economy expands its capital stock near zero and long run consumption is bounded away from zero with certainty. Our conditions highlight the important role played by risk aversion for small consumption levels.

Keywords: Stochastic growth; Sustained consumption; Extinction; Risk aversion (search for similar items in EconPapers)
JEL-codes: D9 E2 O41 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (4)

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Working Paper: Sustained Positive Consumption in a Model of Stochastic Growth: The Role of Risk Aversion (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:147:y:2012:i:2:p:850-880

DOI: 10.1016/j.jet.2010.12.010

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