Optimal experimentation and the perturbation method in the neighborhood of the augmented linear regulator problem

Thomas Cosimano ()

Journal of Economic Dynamics and Control, 2008, vol. 32, issue 6, 1857-1894

Abstract: The perturbation method is used to approximate optimal experimentation problems. The approximation is in the neighborhood of the linear regulator (LR) problem. The first order perturbation of the optimal decision under experimentation is a combination of the LR solution and a term that captures the impact of the uncertainty on the agent's value function. An algorithm is developed in a companion paper to quickly implement this procedure on the computer. As a result, the impact of optimal experimentation on an agent's decisions can be quantified and estimated for a large class of problems encountered in economics.

Date: 2008
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