@techreport{94a6f78503954b359c57744ad3cafa92,

title = "Scrap Value Functions in Dynamic Decision Problems",

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.",

author = "M. Ikefuji and R.J.A. Laeven and J.R. Magnus and C.H.M. Muris",

note = "Pagination: 18",

year = "2010",

language = "English",

volume = "2010-77",

series = "CentER Discussion Paper",

publisher = "Econometrics",

type = "WorkingPaper",

institution = "Econometrics",

}