Investment Under Risk with Discrete and Continuous Assets: Solution and Estimation
Tinbergen Institute Discussion Paper 09-054/2
32 Pages Posted: 19 Jun 2009
Date Written: June 19, 2009
This paper considers a general class of stochastic dynamic choice models with discrete and continuous decision variables. This class contains a variety of models that are useful for modeling intertemporal household decisions under risk. Our examples are drawn from the field of development economics. We formalize this class as a dynamic programming problem, then propose a solution method that relies on value function iteration. Finally, in an example we show how our algorithm can be applied to solve and estimate a dynamic model with discrete and continuous controls.
Keywords: value function iteration, mixed continuous/discrete controls, stochastic dynamic choice model
JEL Classification: C61, C63, C51, E12, G11, Q12
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