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Scrap Value Functions in Dynamic Decision Problems

Listed author(s):
  • Ikefuji, M.
  • Laeven, R.J.A.

    (Tilburg University, Center For Economic Research)

  • Magnus, J.R.

    (Tilburg University, Center For Economic Research)

  • Muris, C.H.M.

    (Tilburg University, Center For Economic Research)

We introduce an accurate, easily implementable, and fast algorithm to compute optimal decisions in discrete-time long-horizon welfaremaximizing problems. The algorithm is useful when interest is only in the decisions up to period T, where T is small. It relies on a flexible parametrization of the relationship between state variables and optimal total time-discounted welfare through scrap value functions. We demonstrate that this relationship depends on the boundedness, half-boundedness, or unboundedness of the utility function, and on whether a state variable increases or decreases welfare. We propose functional forms for this relationship for large classes of utility functions and explain how to identify the parameters.

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File URL: https://pure.uvt.nl/portal/files/1251065/2010-77.pdf
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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2010-77.

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Date of creation: 2010
Handle: RePEc:tiu:tiucen:94a6f785-0395-4b35-9c57-744ad3cafa92
Contact details of provider: Web page: http://center.uvt.nl

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