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Economic modeling approaches: optimization versus equilibrium


  • Olga Kiuila

    () (Faculty of Economic Sciences, University of Warsaw)

  • Thomas F. Rutherford

    () (ETH Zurich, Centre for Energy Policy and Economics)


The paper discusses three general classes of nonlinear programming models. Our objective is to show how to represent optimization problem, such as nonlinear programs, in a compact format using extended mathematical programming. This is a useful tool, especially in cases when complementarity representation, such as mixed complementarity problems, could be difficult to apply. We reflect on the special features of the abstract neoclassical growth model with infinite horizon and illustrate four distinct approaches to computing equilibrium transition paths. The relationship between optimization and equilibrium modeling is explored. We conclude with a test of a new model representation (extended mathematical programming) using two common general equilibrium studies in the literature: Ramsey and Negishi. The new framework allows to define complementarity problems for a model formulated as an optimization problem, thus the resulting model becomes in fact a complementarity problem.

Suggested Citation

  • Olga Kiuila & Thomas F. Rutherford, 2014. "Economic modeling approaches: optimization versus equilibrium," Working Papers 2014-04, Faculty of Economic Sciences, University of Warsaw.
  • Handle: RePEc:war:wpaper:2014-04

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    References listed on IDEAS

    1. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215-215.
    2. Victor Ginsburgh & Michiel Keyzer, 2002. "The Structure of Applied General Equilibrium Models," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262571579, July.
    3. Ginsburgh, Victor A. & Van der Heyden, Ludo, 1988. "On extending the negishi approach to computing equilibria: The case of government price support policies," Journal of Economic Theory, Elsevier, vol. 44(1), pages 168-178, February.
    4. Lau, Morten I. & Pahlke, Andreas & Rutherford, Thomas F., 2002. "Approximating infinite-horizon models in a complementarity format: A primer in dynamic general equilibrium analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 26(4), pages 577-609, April.
    5. van Geldrop, Jan H. & Withagen, Cees A. A. M., 1994. "General equilibrium in an economy with exhaustible resources and an unbounded horizon," Journal of Economic Dynamics and Control, Elsevier, vol. 18(5), pages 1011-1035, September.
    6. Bohringer, Christoph & Loschel, Andreas & Rutherford, Thomas F., 2007. "Decomposing the integrated assessment of climate change," Journal of Economic Dynamics and Control, Elsevier, vol. 31(2), pages 683-702, February.
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    Cited by:

    1. Nolan, Sheila & Devine, Mel & Lynch, Muireann & O'Malley, Mark, 2016. "Impact of Demand Response Participation in Energy, Reserve and Capacity Markets," MPRA Paper 74672, University Library of Munich, Germany.

    More about this item


    nonlinear programming; complementarity programming; extended mathematical programming; computable general equilibrium modeling; infinite horizon;

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models

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