Nederlandse Organisatie voor Wetenschappelijk Onderzoek (NWO)
What is the effect of unpredictable variations in economic productivity on economic growth? Do economic fluctuations retard or enhance economic growth and what are the mechanisms that determine this relationship? The answers to these questions will help improve our understanding of the factors that contribute to economic growth. This research should help us better understand why it is that some economies grow faster than others and the role that uncertainty plays in determining economic growth. The proposed research will extend the theory of economic growth in new directions. Altough much work has been done in the field of stochastic endogenous growth models, there are only a few analyses on the influence of uncertainty on (the distribution of) the long-term growth rate. Previous work on economic growth under uncertainty has focused on issues like the existence of a limiting distribution for capital and consumption, but has not tried to understand how the distribution of productivity shocks affects growth in the long run. The research project contains the following three parts: 1. Technological change under uncertainty: a real options approach. This part of the research deals, theoretically, with the effect of uncertainty on the rate of technological change. The investment decisions of the firms will be modelled according to the real options approach 2. Conditions for sustained growth in a stochastic environment.