Elements of Numerical Mathematical Economics with Excel

Chapter 11

Discrete dynamic programming

Abstract

With Discrete Dynamic Programming (DDP), we refer to a set of computational techniques of optimization that are attributable to the works developed by Richard Bellman and his associates. DDP has a few key characteristics: the objective function of the problem is to be separable in stages, so that we obtain a sequential decision problem. Then, we can always formalize a recurrence relation (i.e., the functional relation of dynamic programming). The Bellman's principle of optimality is always applied to solve the problem and, finally, is often required to have integer solutions. This chapter shows how the basic computational techniques can be implemented in Excel for DDP, resorting to some ...