Optimal Growth and Uncertainty: Learning

in Journal of Economic Theory (2009), 144

We introduce learning in a Brock-Mirman environment and study the effect of risk generated by the planner’s econometric activity on optimal consumption and investment. Here, learning introduces two ... [more ▼]

We introduce learning in a Brock-Mirman environment and study the effect of risk generated by the planner’s econometric activity on optimal consumption and investment. Here, learning introduces two sources of risk about future payoffs: structural uncertainty and uncertainty from the anticipation of learning. The latter renders control and learning nonseparable. We present two sets of results in a learning environment. First, conditions under which the introduction of learning increases or decreases optimal consumption are provided. The effect depends on the strengths and directions of the two sources of risk, which may pull in opposite directions. Second, the effects of changes in the mean and riskiness of the distribution of the signal and initial beliefs on optimal consumption are studied. [less ▲]