Economic growth and abatement activities in a stochastic environment: a multi-objective approach

We analyze the effect of uncertainty on economic growth and environmental quality in a concave stochastic bicriteria dynamic problem, solved by means of scalarization techniques and the Hamilton-Jacobi-Bellman equation. Specifically, we focus on an endogenous growth model with purposive abatement activities, where environmental quality, subject to random shocks, is merely a source of utility and does not play any productive role. We show that even in the absence of direct (environmental) productivity effects, along the optimal path production results enhanced by an indirect productivity effect, which transforms environmental quality into the engine of growth. However, this does not prevent uncertainty to dampen economic and environmental performance, leading to a lower social welfare than in a deterministic framework.