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Avoiding the curse of dimensionality in dynamic stochastic games

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  • Ulrich Doraszelski
  • Kenneth L. Judd

Abstract

Discrete-time stochastic games with a finite number of states have been widely ap- plied to study the strategic interactions among forward-looking players in dynamic en- vironments. However, these games suffer from a "curse of dimensionality" since the cost of computing players' expectations over all possible future states increases exponentially in the number of state variables. We explore the alternative of continuous-time stochas- tic games with a finite number of states, and show that continuous time has substantial computational and conceptual advantages. Most important, continuous time avoids the curse of dimensionality, thereby speeding up the computations by orders of magnitude in games with more than a few state variables. Overall, the continuous-time approach opens the way to analyze more complex and realistic stochastic games than currently feasible.
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Suggested Citation

  • Ulrich Doraszelski & Kenneth L. Judd, 2012. "Avoiding the curse of dimensionality in dynamic stochastic games," Quantitative Economics, Econometric Society, vol. 3(1), pages 53-93, March.
    • Handle: RePEc:ecm:quante:v:3:y:2012:i:1:p:53-93
    DOI: QE153
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    References listed on IDEAS

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    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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