Some economic models need constraints imposed on control and/or state-space constraints. In most cases, nonetheless, the use of constraints is avoided because it brings significant technical difficulties to a model. This paper offers a new practical technique to solve control and state-space constraints in optimal control problems when the constraint variable appears in the utility function. We do this by integrating the constraint into the optimization problem. It is shown that the technique works for both control and state constraints.
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Paper provided by University of Groningen, CCSO Centre for Economic Research in its series CCSO Working Papers with number
200207.