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Optimal regime switching and threshold effects

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  • Boucekkine, R.
  • Pommeret, A.
  • Prieur, F.

Abstract

We consider a general control problem with two types of optimal regime switch. The first one concerns technological and/or institutional regimes indexed by a finite number of discrete parameter values, and the second features regimes relying on given threshold values for given state variables. We propose a general optimal control framework allowing to derive the first-order optimality conditions and in particular to characterize the geometry of the shadow prices at optimal switching times (if any). We apply this new optimal control material to address the problem of the optimal management of natural resources under ecological irreversibility, and with the possibility to switch to a backstop technology.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 12 ()
Pages: 2979-2997

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:12:p:2979-2997

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Multi-stage optimal control; Threshold effects; Irreversibility; Non-renewable resources; Backstop technology;

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References

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  1. Zampolli, Fabrizio, 2006. "Optimal monetary policy in a regime-switching economy: The response to abrupt shifts in exchange rate dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 30(9-10), pages 1527-1567.
  2. Oded_Galor, 2004. "The Demographic Transition and the Emergence of Sustained Economic Growth," Working Papers 2004-13, Brown University, Department of Economics.
  3. Valente, Simone, 2011. "Endogenous Growth, Backstop Technology Adoption, And Optimal Jumps," Macroeconomic Dynamics, Cambridge University Press, vol. 15(03), pages 293-325, June.
  4. Makris, Miltiadis, 2001. "Necessary conditions for infinite-horizon discounted two-stage optimal control problems," Journal of Economic Dynamics and Control, Elsevier, vol. 25(12), pages 1935-1950, December.
  5. Olli Tahvonen, 1997. "Fossil Fuels, Stock Externalities, and Backstop Technology," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 855-74, November.
  6. Pommeret, Aude & Schubert, Katheline, 2009. "Abatement Technology Adoption Under Uncertainty," Macroeconomic Dynamics, Cambridge University Press, vol. 13(04), pages 493-522, September.
  7. Raouf Boucekkine & Aude Pommeret & Fabien Prieur, 2013. "Technological vs. Ecological Switch and the Environmental Kuznets Curve," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 95(2), pages 252-260.
  8. Tomiyama, Ken, 1985. "Two-stage optimal control problems and optimality conditions," Journal of Economic Dynamics and Control, Elsevier, vol. 9(3), pages 317-337, November.
  9. Michel, P., 1980. "On the Transversality Condition in Infinite Horizon Optimal Problems," Cahiers de recherche 8024, Universite de Montreal, Departement de sciences economiques.
  10. Azariadis, Costas & Drazen, Allan, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 501-26, May.
  11. Parente Stephen L., 1994. "Technology Adoption, Learning-by-Doing, and Economic Growth," Journal of Economic Theory, Elsevier, vol. 63(2), pages 346-369, August.
  12. Karp, Larry & Zhang, Jiangfeng, 2008. "Taxes Versus Quantities for a Stock Pollutant with Endogenous Abatement Costs and Asymmetric Information," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt84q0s8tb, Department of Agricultural & Resource Economics, UC Berkeley.
  13. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
  14. Tahvonen, Olli & Withagen, Cees, 1996. "Optimality of irreversible pollution accumulation," Journal of Economic Dynamics and Control, Elsevier, vol. 20(9-10), pages 1775-1795.
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Cited by:
  1. Ngo Van Long & Fabien Prieur & Klarizze Puzon & Mabel Tidball, 2014. "Markov Perfect Equilibria in Differential Games with Regime Switching Strategies," CESifo Working Paper Series 4662, CESifo Group Munich.
  2. Raouf Boucekkine & Blanca Martinez & Ramon Ruiz-Tamarit, 2013. "Optimal Sustainable Policies under Pollution Ceiling: The Demographic Side," AMSE Working Papers 1354, Aix-Marseille School of Economics, Marseille, France, revised 04 Nov 2013.

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