Simulating Discounted Costs

Bennett L. Fox and Peter W. Glynn
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Bennett L. Fox: Department of Mathematics, University of Colorado, Denver, Colorado 80204-5300
Peter W. Glynn: Department of Operations Research, Stanford University, Stanford, California 94305

Management Science, 1989, vol. 35, issue 11, 1297-1315

Abstract: We numerically estimate, via simulation, the expected infinite-horizon discounted cost d of running a stochastic system. A naive strategy estimates a finite-horizon approximation to d. We propose alternatives. All are ranked with respect to asymptotic variance as a function of computer-time budget and discount rate, when semi-Markov and/or regenerative structure or neither is assumed. In this setting, the naive truncation estimator loses; it may triumph, however, when the computer-time budget is modest, the discount rate is large, and the process simulated is not regenerative or has long cycle lengths.

Keywords: discounted costs; simulation; semi-Markov process; regenerative process (search for similar items in EconPapers)
Date: 1989
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