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Robust Control and Hot Spots in Spatiotemporal Economic Systems

  • Athanasios Yannacopoulos
  • Anastasios Xepapadeas
  • William Brock

We formulate stochastic robust optimal control problems, motivated by applications arising in interconnected economic systems, or spatially extended economies. We study in detail linear quadratic problems and nonlinear problems. We derive optimal robust controls and identify conditions under which concerns about model misspecification at specific site(s) could cause regulation to break down, to be very costly, or to induce pattern formation and spatial clustering. We call sites associated with these phenomena hot spots. We also provide an application of our methods by studying optimal robust control and the potential break down of regulation, due to hot spots, in a model where utility for in situ consumption is distance dependent. Copyright Springer Science+Business Media New York 2014

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Paper provided by Athens University of Economics and Business in its series DEOS Working Papers with number 1223.

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Handle: RePEc:aue:wpaper:1223
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