publication . Preprint . 2012

A generalized endogenous grid method for discrete-continuous choice

John Rust; Bertel Schjerning; Fedor Iskhakov;
Open Access
  • Published: 01 Jan 2012
This paper extends Carroll's endogenous grid method (2006 "The method of endogenous gridpoints for solving dynamic stochastic optimization problems", Economic Letters) for models with sequential discrete and continuous choice. Unlike existing generalizations, we propose solution algorithm that inherits both advantages of the original method, namely it avoids all root finding operations, and also efficiently deals with restrictions on the continuous decision variable. To further speed up the solution, we perform the inevitable optimization across discrete decisions as more efficient computation of upper envelope of a set of piece-wise linear functions. We formula...

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1. Allow a0 = M . Calculate m(a0). If m(a0) M , set ba = a0, mb = m(a0) and proceed to next step, otherwise let a0 21 (a0 + A0) and repeat this step.

2. Set i = 0 ai = A0 and calculate m(ai).

3. Find ai such that the straight line through (ai; m(ai)) and (ba; mb) takes value M at ai.

4. Divide the interval (ai; ai) into n

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