Scrap Value Functions in Dynamic Decision Problems

CentER Discussion Paper Series No. 2010-77

18 Pages Posted: 30 Jul 2010

See all articles by Masako Ikefuji

Masako Ikefuji

University of Tsukuba

Roger J. A. Laeven

University of Amsterdam - Department of Quantitative Economics (KE)

J.R. Magnus

Vrije Universiteit Amsterdam, School of Business and Economics

Chris Muris

affiliation not provided to SSRN

Date Written: July 23, 2010

Abstract

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.

Keywords: Scrap value function, Dynamic optimization, Computation, Short horizon

JEL Classification: C61, C63

Suggested Citation

Ikefuji, Masako and Laeven, Roger Jean Auguste and Magnus, Jan R. and Muris, Chris, Scrap Value Functions in Dynamic Decision Problems (July 23, 2010). CentER Discussion Paper Series No. 2010-77. Available at SSRN: https://ssrn.com/abstract=1649990 or http://dx.doi.org/10.2139/ssrn.1649990

Masako Ikefuji (Contact Author)

University of Tsukuba ( email )

Tsukuba University , Ibaraki Ken
Tsukuba, Ibaraki 305-8573, Ibaraki 3050006
Japan

Roger Jean Auguste Laeven

University of Amsterdam - Department of Quantitative Economics (KE) ( email )

Valckenierstraat 65-67
Amsterdam, 1018 XE
Netherlands
+31 20 525 4252 (Phone)

HOME PAGE: http://www.rogerlaeven.com

Jan R. Magnus

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Chris Muris

affiliation not provided to SSRN ( email )

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