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Stochastic Cost Benefit Rules: A Back-of-a-Lottery-Ticket Calculation Method

Author

Listed:
  • Aronsson, Thomas

    (Department of Economics, Umeå University)

  • Löfgren, Karl-Gustaf

    (Department of Economics, Umeå University)

  • Nyström, Kaj

    (Department of Mathematics)

Abstract

In this paper, we introduce cost benefit rules for projects embedded in a stochastic optimal growth framework. We model uncertainty in terms of Brownian motion and Ito integrals. Taking the mathematical expectation of the project means that the Ito integrals vanish, and we end up with a cost benefit rule that closely resembles its deterministic counterpart.

Suggested Citation

  • Aronsson, Thomas & Löfgren, Karl-Gustaf & Nyström, Kaj, 2003. "Stochastic Cost Benefit Rules: A Back-of-a-Lottery-Ticket Calculation Method," Umeå Economic Studies 606, Umeå University, Department of Economics.
    • Handle: RePEc:hhs:umnees:0606
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    References listed on IDEAS

    as
    1. Thomas Aronsson, 1999. "On Cost Benefit Rules for Green Taxes," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 13(1), pages 31-43, January.
    2. LaFrance, Jeffrey T. & Barney, L. Dwayne, 1991. "The envelope theorem in dynamic optimization," Journal of Economic Dynamics and Control, Elsevier, vol. 15(2), pages 355-385, April.
    3. Caputo, Michael R., 1990. "How to do comparative dynamics on the back of an envelope in optimal control theory," Journal of Economic Dynamics and Control, Elsevier, vol. 14(3-4), pages 655-683, October.
    4. Runar Brännlund & Ing-Marie Gren (ed.), 1999. "Green Taxes," Books, Edward Elgar Publishing, number 1527.
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    Cited by:

    1. Löfgren, Karl-Gustaf, 2011. "On Envelope Theorems in Economics: Inspired by a Revival of a Forgotten Lecture," Umeå Economic Studies 830, Umeå University, Department of Economics.

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    More about this item

    Keywords

    Cost benefit analysis; stochastic optimal control theory; Brownian motion;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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