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A note on uncertainty and discounting in models of economic growth

Jan 2009
Working Paper
08-017
By  Kenneth Arrow
The implications of uncertainty for appropriate discounting in models of economic growth have been studied at some length, notably, Levhari and Srinivasan (1969), Gollier (2002). A detailed account has now appeared in Dasgupta (2008), sections 4 and 5 (pp. 160-166). One interesting, if perhaps minor, aspect is that under certain circumstances, there appeared to be no solution or at least no satisfactory one. More importantly, the formulas are usually given for the log normal case and are somewhat complicated and hard to interpret intuitively.

I show here that assuming a general distribution for returns to capital gives simpler and more understandable results.