On some aspects of survival under production uncertainty (Q1341441)

This paper considers a dynamic model of consumption and investment with production uncertainty, in which the agent is required to meet a certain minimum consumption level, \(c\). The paper uses the recursive logic to derive the survival probability function, \(V(x)\), which describes the maximum probability that the agent is able to meet this requirement for each initial stock of exhaustible resource, \(x\). The paper also discusses the properties of this function. It shows that for any given \(c\), there are two critical values \(\alpha\) and \(\beta\), such that ruin is almost inevitable for any \(x\) below \(\alpha\), and survival is almost ensured if \(x\) is no less than \(\beta\). For \(x\in[\alpha,\beta]\) the survival probability, \(V\), is an increasing function of \(x\) , and is \(S\) shaped (convex-concave) for the linear and the canonical nonlinear technologies. The \(S\)-shaped \(V\) function implies that a policy that maximizes the survival probability is not necessarily egalitarian.