American Economic Review: Insights
ISSN 2640-205X (Print) | ISSN 2640-2068 (Online)
Decision Theory and Stochastic Growth
American Economic Review: Insights
vol. 5,
no. 3, September 2023
(pp. 357–76)
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 empirical distributions that match the solution to the wishful thinking or rational inattention problem.Citation
Robson, Arthur, Larry Samuelson, and Jakub Steiner. 2023. "Decision Theory and Stochastic Growth." American Economic Review: Insights, 5 (3): 357–76. DOI: 10.1257/aeri.20220456Additional Materials
JEL Classification
- D31 Personal Income, Wealth, and Their Distributions
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D82 Asymmetric and Private Information; Mechanism Design
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
- O41 One, Two, and Multisector Growth Models