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Differentiability of the value function without interiority assumptions

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  • Santos, Manuel S.

Abstract

This paper studies first-order differentiability properties of the value function in concave dynamic programs. Motivated by economic considerations, we dispense with commonly imposed interiority assumptions. We suppose that the correspondence of feasible choices varies with the vector of state variables, and we allow the optimal solution to belong to the boundary of this correspondence. Under minimal assumptions we show that the value function is continuously differentiable. We then discuss this result in the context of several economic models.

Suggested Citation

  • Santos, Manuel S., 2007. "Differentiability of the value function without interiority assumptions," UC3M Working papers. Economics we071405, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:we071405
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    3. Zhigang Feng & Jianjun Miao & Adrian Peralta‐Alva & Manuel S. Santos, 2014. "Numerical Simulation Of Nonoptimal Dynamic Equilibrium Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(1), pages 83-110, February.
    4. Marimon, Ramon & Werner, Jan, 2021. "The envelope theorem, Euler and Bellman equations, without differentiability," Journal of Economic Theory, Elsevier, vol. 196(C).
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    6. F. García Castaño & M. Melguizo Padial, 2015. "A natural extension of the classical envelope theorem in vector differential programming," Journal of Global Optimization, Springer, vol. 63(4), pages 757-775, December.
    7. Robert Kirkby Author-Email: robertkirkby@gmail.com|, 2017. "Convergence of Discretized Value Function Iteration," Computational Economics, Springer;Society for Computational Economics, vol. 49(1), pages 117-153, January.
    8. Rocheteau, Guillaume & Weill, Pierre-Olivier & Wong, Tsz-Nga, 2021. "An heterogeneous-agent New-Monetarist model with an application to unemployment," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 64-90.
    9. Strulovici, Bruno & Szydlowski, Martin, 2015. "On the smoothness of value functions and the existence of optimal strategies in diffusion models," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 1016-1055.
    10. Bruno Strulovici & Martin Szydlowski, 2012. "On the Smoothness of Value Functions," Discussion Papers 1542, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    11. Juan Pablo Rincón-Zapatero, 2020. "Differentiability of the value function and Euler equation in non-concave discrete-time stochastic dynamic programming," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(1), pages 79-88, April.
    12. Tessa Bold, 2009. "Implications of Endogenous Group Formation for Efficient Risk‐Sharing," Economic Journal, Royal Economic Society, vol. 119(536), pages 562-591, March.
    13. Damián Pierri, 2021. "Memory, Multiple Equilibria And Emerging Market Crises," Documentos de trabajo del Instituto Interdisciplinario de Economía Política IIEP (UBA-CONICET) 2021-62, Universidad de Buenos Aires, Facultad de Ciencias Económicas, Instituto Interdisciplinario de Economía Política IIEP (UBA-CONICET).
    14. Pontus Rendahl, 2015. "Inequality Constraints and Euler Equation‐based Solution Methods," Economic Journal, Royal Economic Society, vol. 125(585), pages 1110-1135, June.
    15. Clausen, Andrew & Strub, Carlo, 2013. "A General and Intuitive Envelope Theorem," SIRE Discussion Papers 2015-43, Scottish Institute for Research in Economics (SIRE).
    16. Morand, Olivier & Reffett, Kevin & Tarafdar, Suchismita, 2015. "A nonsmooth approach to envelope theorems," Journal of Mathematical Economics, Elsevier, vol. 61(C), pages 157-165.
    17. Jaime McGovern & Olivier Morand & Kevin Reffett, 2013. "Computing minimal state space recursive equilibrium in OLG models with stochastic production," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 54(3), pages 623-674, November.
    18. Rohit Lamba & Ilia Krasikov, 2017. "A Theory of Dynamic Contracting with Financial Constraints," 2017 Meeting Papers 1544, Society for Economic Dynamics.
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    20. Rincón-Zapatero, Juan Pablo & Zhao, Yanyun, 2018. "Envelope theorem in dynamic economic models with recursive utility," Economics Letters, Elsevier, vol. 163(C), pages 10-12.
    21. Olivier Morand & Kevin Reffett & Suchismita Tarafdar, 2018. "Generalized Envelope Theorems: Applications to Dynamic Programming," Journal of Optimization Theory and Applications, Springer, vol. 176(3), pages 650-687, March.

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    More about this item

    Keywords

    Constrained optimization;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • P51 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems

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