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Applied Mathematics and Optimization, Vol.61, No.3, 421-434, 2010
Two Characterizations of Optimality in Dynamic Programming
It holds in great generality that a plan is optimal for a dynamic programming problem, if and only if it is "thrifty" and "equalizing." An alternative characterization of an optimal plan, that applies in many economic models, is that the plan must satisfy an appropriate Euler equation and a transversality condition. Here we explore the connections between these two characterizations.
Keywords:Dynamic programming;Optimality;Thriftiness;Equalization;Euler equations;Envelope equation;Transversality condition