Rationalizing Policy Functions by Dynamic Optimization

Tapan Mitra and Gerhard Sorger

Econometrica, 1999, vol. 67, issue 2, 375-392

Abstract: The authors derive necessary and sufficient conditions for a pair of functions to be the optimal policy function and the optimal value function of a dynamic maximization problem with convex constraints and concave objective functional. It is shown that every Lipschitz continuous function can be the solution of such a problem. If the maintained assumptions include free disposal and monotonicity, then the authors obtain a complete characterization of all optimal policy and optimal value functions. This is the case, e.g., in the standard aggregative optimal growth model.

Date: 1999
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