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A general endogenous grid method for multi-dimensional models with non-convexities and constraints

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  • Druedahl, Jeppe
  • Jørgensen, Thomas Høgholm
Abstract
The endogenous grid method (EGM) significantly speeds up the solution of stochastic dynamic programming problems by simplifying or completely eliminating root-finding. We propose a general and parsimonious EGM extended to handle (1) multiple continuous states and choices, (2) multiple occasionally binding constraints, and (3) non-convexities such as discrete choices. Our method enjoys the speed gains of the original one-dimensional EGM, while avoiding expensive interpolation on multi-dimensional irregular endogenous grids. We explicitly define a broad class of models for which our solution method is applicable, and illustrate its speed and accuracy using a consumption–saving model with both liquid assets and illiquid pension assets and a discrete retirement choice.

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  • Druedahl, Jeppe & Jørgensen, Thomas Høgholm, 2017. "A general endogenous grid method for multi-dimensional models with non-convexities and constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 74(C), pages 87-107.
    • Handle: RePEc:eee:dyncon:v:74:y:2017:i:c:p:87-107
    DOI: 10.1016/j.jedc.2016.11.005
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    3. Iskhakov, Fedor & Keane, Michael, 2021. "Effects of taxes and safety net pensions on life-cycle labor supply, savings and human capital: The case of Australia," Journal of Econometrics, Elsevier, vol. 223(2), pages 401-432.
    4. Jeppe Druedahl & Alessandro Martinello, 2022. "Long-Run Saving Dynamics: Evidence from Unexpected Inheritances," The Review of Economics and Statistics, MIT Press, vol. 104(5), pages 1079-1095, December.
    5. Clausen, Andrew & Strub, Carlo, 2020. "Reverse Calculus and nested optimization," Journal of Economic Theory, Elsevier, vol. 187(C).
    6. Fedor Iskhakov & Michael Keane, 2018. "Effects of Taxes and Safety Net Pensions on life-cycle Labor Supply, Savings and Human Capital: the Case of Australia," Discussion Papers 2018-09, School of Economics, The University of New South Wales.
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    8. Jang, Youngsoo & Lee, Soyoung, 2019. "A Generalized Endogenous Grid Method for Models with the Option to Default," MPRA Paper 95721, University Library of Munich, Germany.
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    More about this item

    Keywords

    Endogenous grid method; Post-decision states; Stochastic dynamic programming; Continuous and discrete choices; Occasionally binding constraints;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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