Differentiability of the value function without interiority assumptions |
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Authors: | Juan Pablo Rincn-Zapatero Manuel S Santos |
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Institution: | aDepartamento de Economía, Universidad Carlos III de Madrid, 28903 Getafe (Madrid), Spain;bDepartment of Economics, University of Miami, Box 248126, Coral Gables, FL 33124, USA |
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Abstract: | This paper studies first-order differentiability properties of the value function in concave dynamic programs. Motivated by economic considerations, we dispense with commonly imposed interiority assumptions. We suppose that the correspondence of feasible choices varies with the vector of state variables, and we allow the optimal solution to belong to the boundary of this correspondence. Under minimal assumptions we prove that the value function is continuously differentiable. We then discuss this result in the context of some economic models, and focus on some examples in which our assumptions are not met and the value function is not differentiable. |
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Keywords: | Constrained optimization Value and policy functions Differentiability Envelope theorem Shadow price |
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