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Optimal Control Response to Multiplicative Uncertainty with a Constant Term

Author

Listed:
  • Fidel Gonzalez

    (Sam Houston State University)

Abstract

In a one-state one-control variable Quadratic Linear Problem, I examine the effect of an increase in the multiplicative uncertainty on the use of the control variable. In contrast with previous studies, this model considers a stochastic constant term in the transition equation. I found that the optimal response depends on the covariance between the parameter with multiplicative uncertainty and the constant term. A nonnegative covariance produces a cautionary response following previous results. However, a negative covariance produces an aggressive response in the optimal control. Hence, previous studies represent a special case of this model. Numerical results are provided using global warming data

Suggested Citation

  • Fidel Gonzalez, 2006. "Optimal Control Response to Multiplicative Uncertainty with a Constant Term," Computing in Economics and Finance 2006 440, Society for Computational Economics.
    • Handle: RePEc:sce:scecfa:440
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    More about this item

    Keywords

    Stochastic Control; Policy Uncertainty;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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