Stochastic technical change, non-renewable resource and optimal sustainable growth

We develop a stochastic endogenous growth model involving a non-renewable resource, in which innovation arrivals are governed by a non-stationary Poisson process. Using a CRRA analytical example, we characterize the optimal trajectories of the model and analyze the effects of uncertainty in the sense of Rothschild and Stiglitz by computing a mean-preserving spread. We show that increased variability in the innovation process always implies a smaller optimal R&D effort, since this leads to a reduced marginal rate of return. Effects on the other variables of the model may also be unambiguously identified depending upon the relative risk aversion of agents, the social discount rate and the marginal arrival rate of innovations. Finally, we investigate the conditions under which, on average, the economy reaches a sustainable growth path. (C) 2006 Elsevier B.V. All rights reserved.