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Knightian Uncertainty and Poverty Trap in a Model of Economic Growth
en
Knightian Uncertainty
Proverty Trap
Endogenous Cycles
Fukuda Shin-ichi
This paper explores how Knightian uncertainty affects dynamic properties in a model of economic growth. The decision-making theory in the analysis is that of expected utility under a non-additive probability measure, that is, the Choquet expected utility model of preference. We apply this decision theory to an overlapping-generations model where producers face uncertainty in their technologies. When the producer has aversion to uncertainty, the firm's profit function may not be differentiable. The firm's decision to invest and hire labor therefore becomes rigid for some measurable rage of real interest rate. In the dynamic equilibrium, the existence of the firm level rigidity causes discontinuity in the wage function, which makes multiple equilibria more likely outcome under log utility and Cobb-Douglass production functions. We show that even if aversion to uncertainty is small, "poverty trap" can arise for a wide range of parameter values.
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Discussion paper series. CIRJE-F
CIRJE-F-502
2007-06
AA11450569
application/pdf
330
日本経済国際共同センター
http://www.cirje.e.u-tokyo.ac.jp/research/dp/2007/2007cf502ab.html