Title: Economic dynamics in the presence of catastrophic risk: The danger of poverty traps
Authors: Raimund Kovacevic - Vienna University of Technology (Austria) [presenting]
Willi Semmler - New School for Social Research (United States)
Abstract: The focus is on economic dynamics described by an optimal control problem, which shows three equilibrium points: An unstable equilibrium lies between an upper and a lower stable equilibrium. In the presence of rare but substantial random shocks between phases of deterministic growth, we analyze the risk of ending up below the unstable equilibrium, which can be considered as poverty trap. We also aim at decision making within this setup, particularly considering the role of insurance against catastrophic events.