Scrap Value Functions in Dynamic Decision Problems

M. Ikefuji, R.J.A. Laeven, J.R. Magnus, C.H.M. Muris

Research output: Working paperDiscussion paperOther research output

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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.
Original languageEnglish
Place of PublicationTilburg
PublisherEconometrics
Number of pages18
Volume2010-77
Publication statusPublished - 2010

Publication series

NameCentER Discussion Paper
Volume2010-77

Fingerprint

Scrap
Value function
Utility function
State variable
Functional form
Discrete-time

Keywords

  • Scrap value function
  • Dynamic optimization
  • Computation
  • Short horizon.

Cite this

Ikefuji, M., Laeven, R. J. A., Magnus, J. R., & Muris, C. H. M. (2010). Scrap Value Functions in Dynamic Decision Problems. (CentER Discussion Paper; Vol. 2010-77). Tilburg: Econometrics.
Ikefuji, M. ; Laeven, R.J.A. ; Magnus, J.R. ; Muris, C.H.M. / Scrap Value Functions in Dynamic Decision Problems. Tilburg : Econometrics, 2010. (CentER Discussion Paper).
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Ikefuji, M, Laeven, RJA, Magnus, JR & Muris, CHM 2010 'Scrap Value Functions in Dynamic Decision Problems' CentER Discussion Paper, vol. 2010-77, Econometrics, Tilburg.

Scrap Value Functions in Dynamic Decision Problems. / Ikefuji, M.; Laeven, R.J.A.; Magnus, J.R.; Muris, C.H.M.

Tilburg : Econometrics, 2010. (CentER Discussion Paper; Vol. 2010-77).

Research output: Working paperDiscussion paperOther research output

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T1 - Scrap Value Functions in Dynamic Decision Problems

AU - Ikefuji, M.

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AU - Magnus, J.R.

AU - Muris, C.H.M.

N1 - Pagination: 18

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KW - Scrap value function

KW - Dynamic optimization

KW - Computation

KW - Short horizon.

M3 - Discussion paper

VL - 2010-77

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Ikefuji M, Laeven RJA, Magnus JR, Muris CHM. Scrap Value Functions in Dynamic Decision Problems. Tilburg: Econometrics. 2010. (CentER Discussion Paper).