Stochastic Optimal Growth with Risky Labor Supply


Production takes time, and labor supply and profit maximization decisions that relate to current production are typically made before all shocks affecting that production have been realized. In this paper we re-examine the problem of stochastic optimal growth with aggregate risk where the timing of the model conforms to this information structure. We provide a set of conditions under which the economy has a unique, nontrivial and stable stationary distribution. In addition, we verify key optimality properties in the presence of unbounded shocks and rewards, and provide the sample path laws necessary for consistent estimation and simulation.


Stochastic stability, Elastic labor, Optimal growth

JEL Classification

C61, C62, O41


Yiyong CAI
CSIRO Centre for Complex Systems Science, Commonwealth Scientific and Industrial Research Organisation, Australia
Centre for Applied Macroeconomic Analysis, Australian National University

Research Institute for Economics and Business Administration
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501 Japan
Phone: +81-78-803-7036
FAX: +81-78-803-7059

Research School of Economics, Australian National University