Econometrica: Mar, 1999, Volume 67, Issue 2

Rationalizing Policy Functions by Dynamic Optimization

https://doi.org/10.1111/1468-0262.00023
p. 375-392

Tapan Mitra, Gerhard Sorger

We 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 we 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.