Stochastic Cost Benefit Rules: A Back-of-a-Lottery-Ticket Calculation Method

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.Cost benefit analysis; stochastic optimal control theory; Brownian motion