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Investment under Risk with Discrete and Continuous Assets

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  • Chris Elbers

    (VU University Amsterdam)

  • Jan Willem Gunning

    (VU University Amsterdam)

  • Melinda Vigh

    (VU University Amsterdam)

Abstract

This paper considers a general class of stochastic dynamic choice models with discrete and continuous decision variables. This class contains a variety of models that are useful for modeling intertemporal household decisions under risk. Our examples are drawn from the field of development economics. We formalize this class as a dynamic programming problem, then propose a solution method that relies on value function iteration. Finally, in an example we show how our algorithm can be applied to solve and estimate a dynamic model with discrete and continuous controls.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 09-054/2.

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Date of creation: 16 Jun 2009
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Handle: RePEc:dgr:uvatin:20090054

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Web page: http://www.tinbergen.nl

Related research

Keywords: value function iteration; mixed continuous/discrete controls; stochastic dynamic choice model;

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  1. Stefan Dercon, 1996. "Wealth, risk and activity choices: cattle in Western Tanzania," Economics Series Working Papers WPS/1996-08, University of Oxford, Department of Economics.
  2. Fafchamps, Marcel & Pender, John, 1997. "Precautionary Saving, Credit Constraints, and Irreversible Investment: Theory and Evidence from Semiarid India," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(2), pages 180-94, April.
  3. Rosenzweig, Mark R. & Wolpin, Kenneth I., 1989. "Credit Market Constraints, Consumption Smoothing and the Accumulation of Durable Production Assets in Low-Income Countries: Investments in Bullocks in India," Bulletins 7487, University of Minnesota, Economic Development Center.
  4. Zimmerman, Frederick J. & Carter, Michael R., 2003. "Asset smoothing, consumption smoothing and the reproduction of inequality under risk and subsistence constraints," Journal of Development Economics, Elsevier, vol. 71(2), pages 233-260, August.
  5. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, December.
  6. Goffe, William L. & Ferrier, Gary D. & Rogers, John, 1994. "Global optimization of statistical functions with simulated annealing," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 65-99.
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