Decision Theory and Stochastic Growth

Jakub Steiner, Arthur Robson and Larry Samuelson

No 17541, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper examines connections between stochastic growth and decision problems. We use tools from the theory of large deviations to show that wishful thinking decision problems are equivalent to utility maximization problems, both of which are equivalent to growth maximization under idiosyncratic risk. Rational inattention problems are equivalent to growth-optimal portfolio problems, both of which are equivalent to growth maximization under aggregate risk. Stochastic growth generates extreme inequality, with nearly all wealth eventually held by those who happen to have faced an empirical distribution of shocks that matches the solution to the wishful thinking or rational inattention problem.

JEL-codes: D63 D8 D9 N1 (search for similar items in EconPapers)
Date: 2022-09
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Journal Article: Decision Theory and Stochastic Growth (2023)
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