Discount factors greater than or equal to one in infinite horizon dynamic discrete choice models

Blom Västberg, Oskar,1987-KTH,Systemanalys och ekonomi,Royal Institute of Technology (författare)

QC 20171214
In this paper, the theory on infinite horizon DDCM's is extended to allow for discount factors greater than or equal to one. The proposed methods are applied to Rust's (1987) bus engine replacement model, where a discount factor of 1.075 is identified using grid search. The infinite horizon problem with and without a terminal state are treated separately. Sufficient conditions are given for the existence of solutions to Bellman's equation in the terminal state problem and to a normalized version of Bellman's equation in the non-terminal state setting. If a terminal state exists, acting according to Bellman's equation still yields the maximum expected total utility under derived conditions on the one-stage utility functions and reachability of the terminal state. In the non-terminal state problem, $\beta=1$ implies that individuals maximize the average cost per stage, but for $\beta>1$ no rationale for acting according to Bellman's equation, even when it has a solution, has been found.

Karlström, Anders,1968-KTH,Infrastruktur och samhällsplanering,Systemanalys och ekonomi(Swepub:kth)u1h4hwn7 (författare)
KTHSystemanalys och ekonomi (creator_code:org_t)

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