Solving the income fluctuation problem with unbounded rewards

Huiyu Li and John Stachurski

Journal of Economic Dynamics and Control, 2014, vol. 45, issue C, 353-365

Abstract: This paper studies the income fluctuation problem without imposing bounds on utility, assets, income or consumption. We prove that the Coleman operator is a contraction mapping over the natural class of candidate consumption policies when endowed with a metric that evaluates consumption differences in terms of marginal utility. We show that this metric is complete, and that the fixed point of the operator coincides with the unique optimal policy. As a consequence, even in this unbounded setting, policy function iteration always converges to the optimal policy at a geometric rate.

Keywords: Coleman operator; Policy iteration; Time iteration; Global convergence (search for similar items in EconPapers)
JEL-codes: C63 E21 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:45:y:2014:i:c:p:353-365

DOI: 10.1016/j.jedc.2014.06.003

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