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A Characterization of the Optimal Certainty Equivalent of the Average Cost via the Arrow-Pratt Sensitivity Function

Rolando Cavazos-Cadena () and Daniel Hernández-Hernández ()
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Rolando Cavazos-Cadena: Departamento de Estadística y Cálculo, Universidad Autónoma Agraria Antonio Narro, Buenavista, Saltillo, COAH 25315, México
Daniel Hernández-Hernández: Centro de Investigación en Matemáticas, Guanajuato, GTO 36000, México

Mathematics of Operations Research, 2016, vol. 41, issue 1, 224-235

Abstract: This work is concerned with finite-state irreducible Markov decision chains satisfying continuity-compactness requirements. It is supposed that the system is driven by a decision maker with utility function U , which, aside mild conditions, is arbitrary, and the performance of a control policy is measured by the long-run average cost criterion induced by U . The main conclusions about this performance index are as follows: (i) the optimal U -average value function coincides with the optimal V -average index for a certain exponential utility V , and (ii) the average criteria associated with U and V have the same class of optimal stationary policies.

Keywords: Arrow-Pratt risk sensitivity; regular utility; continuity of exponential average costs; monotonicity of certainty equivalents with respect to the Arrow-Pratt function (search for similar items in EconPapers)
Date: 2016
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