Stochastic Optimal Growth with Nonconvexities

Abstract

This paper studies optimal investment and dynamic behavior in stochastically growing economies. We assume neither convex technology nor bounded support of the productivity shocks. A number of basic results concerning the investment policy and the Ramsey-Euler equation are established. We also prove a fundamental dichotomy pertaining to optimal growth models perturbed by standard econometric shocks: either an economy is globally stable or it is globally collapsing to the origin.