Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 606: Stochastic Cost Benefit Rules: A Back-of-a-Lottery-Ticket Calculation Method

Thomas Aronsson (), Karl-Gustaf Löfgren () and Kaj Nyström ()
Additional contact information
Thomas Aronsson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Karl-Gustaf Löfgren: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Kaj Nyström: Department of Mathematics, Postal: Umeå University, S 901 87 Umeå, Sweden

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.

Keywords: Cost benefit analysis; stochastic optimal control theory; Brownian motion

JEL-codes: C60; D61; D81

12 pages, March 26, 2003

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