Capital reallocation and sustainable growth with ambiguity to disaster risk

We formulate a two-sector general equilibrium model that incorporates capital reallocation and ambiguity aversion to disaster risk under recursive utility. We demonstrate how capital distribution between green and brown sectors influences endogenous investment, growth rate, risk-free rate, and uncertainty premium. Moreover, we reveal that ambiguity aversion to disaster risk accelerates capital reallocation, thus explaining the rapid green transformation during the ambiguous circumstances. Furthermore, we find that although the marginal growth rate associated with capital reallocation decreases at the sectoral level, it increases at the aggregate level, implying that capital reallocation contributes to sustainable growth. Our findings also reveal that the disaster uncertainty premium, comprising disaster risk premium and ambiguity premium, is additive even though the utility is not.