Comment.Math.Univ.

Carolinae 38,1 (1997)193{202 193

On a nonstationary discrete time innite

horizon growth model with uncertainty
Nikolaos S. Papageorgiou, Francesca Papalini, Susanna Vercillo

Abstract. In this paper we examine a nonstationary discrete time, innite horizon growth
model with uncertainty. Under very general hypotheses on the data of the model, we
establish the existence of an optimal program and we show that the values of the nite
horizon problems tend to that of the innite horizon as the end of the planning period
approaches innity. Finally we derive a transversality condition for optimality which
does not involve dual variables (prices).
Keywords: growth model, discrete time, innite horizon, nite horizon, uncertainty,
utility function, technology multifunction, optimal program, transversality condition
Classication: 90A20

1. Introduction
In a recent paper [12], the rst author examined a nonstationary, innite hori-
zon multisector growth model with uncertainty and discounted future utilities.
For the general model, rst he proved the existence of a strongly optimal pro-
gram and then he characterized it using a system of supporting prices. One of
the necessary conditions for optimality, was a transversality condition, that says
that the expected value of the input (and of the output) goes to zero as the time
k ! 1.
The purpose of this paper is to generalize some of the results in [12]. For the
existence part we weaken the hypotheses on the data of the model to include
some economically important cases and for the necessary condition, we obtain a
transversality condition that does not involve dual variables (i.e. price systems)
Furthermore our existence result also proves the convergence of the value of
the nite horizon problems to the value of the innite horizon one (approximation
result). The open-endedness of the future is very important from an economic
viewpoint, because it expresses the fundamental fact that the consequences of
investment are very long lived. A nite planning horizon requires some methods
of evaluating end-of-period capital stocks and the only proper evaluation is their
value in use in the subsequent future (cf. C. Arrow-M. Kurz [2]). However the
innity of the planning horizon is impractical from a computational viewpoint.
To actually solve these problems, we must content ourselves with nite horizon
approximates and guarantee that their value converges to that of the innite
horizon problem as the end of the planning period goes to innity.
194 N.S. Papageorgiou, F. Papalini, S. Vercillo

The earlier deterministic works by B. Peleg-H. Ryder [13] and M.L. Weitzman
[15] and the stochastic works by I. Evstigneev [9], M.I. Taksar [14] and N.S. Pa-
pageorgiou [12] did not cover the case where the utility uk (x; y) goes to 1 as
kxk; kyk ! 0 such as uk (x; y) = ln kx yk or uk (x; y) = kx 1yk . This is of special
importance in economics, where in many cases the zero input-output combina-
tion has to be penalized much more heavily than by simply setting uk (0; 0) = 0
or equal to some large but xed negative value.

2. The model and preliminaries

The model that we use in this study is basically that used by Kravvaritis-
Papageorgiou (cf. [10, p. 159]) and Papageorgiou (cf. [12, p. 228]). Kravvaritis-
Papageorgiou [10] studied a similar problem with the present work. Namely they
investigated the robustness of the model with respect to variations in the data
determining it (sensitivity analysis). Here we investigate how nite horizon values
of the problem approximate the desired innite horizon version of it. Such a result
is clearly useful because the innite horizon model is an idealization of the actual
economic situation. In reality we can only compute nite horizon approximations
of the model and thus we want to know whether these approximations converge
to the value of the problem as the time horizon tends to innity.
The stochastic growth model under consideration is the following: (
; ; ) is
a complete probability space. As usual each ! 2
represents one possible state
of the environment. The  is the set of all possible events and (
) the prob-
ability distribution of the states. The time horizon is N0 = f0; 1; 2; : : : g, which
means that our model is discrete-time, innite horizon. The uncertainty about the
states is described
W  .byEach an increasing sequence fngn0 of sub--elds of  such
that  = 1 n=0 n n represents the information available up until time
n  0. Our commodity space is a separable re exive Banach space X . During
the last decade, many mathematical economists, in particular those working on
equilibrium theory, have considered models involving an innite dimensional com-
modity space (we refer to the book by C. Alliprantis-D. Brown-O. Burkinshaw [1]
and the references therein). There are many good reasons justifying the use of an
innite dimensional commodity space. In many situations, the same product at
dierent times should be considered as a dierent good and this naturally leads to
an innite dimensional setting. The same is true with some particular, important
models, like the overlapping generations model. But more importantly, working
with an innite dimensional space, which does not provide all the conveniences of
the standard nite dimensional case, we achieve a better and deeper understand-
ing of the conventional case. Finally the innite dimensional model depicts better
the situation where we deal with a nite yet very large number of commodities.
This is analogous to the situation in equilibrium theory, where problems involving
a large number of traders, were studied (following the lead of Aumann [3]) using
a continuum of traders and this approach led to some very powerful results and a
better understanding of the original situation. We are also given a discount factor
 Growth with uncertainty 195
 2 (0; 1) with which we discount future utilities.
At each time instant n  1, the technological possibilities of our economy are
described by a multifunction Fn :
! 2X X n; which has a n  B (X )  B (X )-
measurable graph (here B (X ) stands for the Borel -eld of X ). Given a time
n  1 and a state of the environment ! 2
, the set Fn (!) includes all input-
output pairs (x; y) 2 X  X , which are feasible given the technology at the time
period from n 1 to n and with the state of the environment being !, and input x
at time n 1, produces an output y at time n. The uncertainty in the production
process is manifested on the hypothesis that
GrFn = f(!; x; y) 2
 X  X : (x; y) 2 Fn (!)g 2 n  B (X )  B (X ):
At each stage n  1, given the state of the environment ! 2
, the utility (gain)
realized by operating a production process (x; y), is given by un (!; x; y), where
un :
 X  X ! R = R [ f 1g is a n  B (X )  B (X )-measurable function.
Again the uncertainty is expressed via the n -measurability of un. At each stage
the utility is discounted by a factor  2 (0; 1).
Built into Fn (!) and un (!;
;
) may be constraints as x; y 2 X+ , with X+
being a closed, convex proper cone in X , furnishing X with a partial order and
also constraints like un(!; x; y) = 1 if (!; x; y) 2= GrFn (i.e. the utility function
un is only dened on GrFn and extended to all of
 X  X , by setting it equal
to 1 outside GrFn ). So our very general formulation accommodates a variety
of important situations.
A program (policy, path) is a sequence xb = fxn gn0 such that xn 2
L (n ; X ), with L1 (n ; X ) being the Lebesgue-Bochner space of integrable X -
1
valued functions dened on (
; n ; ). Let v 2 L1 (0 ; X ) be the initial capital
stock of our economy.
A program xb is said to be feasible if x0 = v and (xn (!); xn+1 (!)) 2 Fn+1 (!)
-a.e. We will denote the set of all feasible programs by H (v).
Given any N > 0, a nite sequence xbN = fxk gNk=0 +1 is said to be N -feasible
program if x0 = v and (xn(!); xn+1 (!)) 2 Fn+1 (!) -a.e. for all n 2
f0; 1; 2; : : :; N g. Of course such a nite sequence is associated with the N -nite
horizon approximation of the original innite horizon problem. We will denote
the set of all N -feasible programs by HN (v).
Our goal is to nd xb 2 P H (v) which maximizes the expected intertemporal
discounted utility U (xb)R = 1 k+1
k=0  Jk+1 (xk ; xk+1 ), where xb = fxk gk0 2
H (v) and Jk+1 (u; v) =
uk+1 (!; u(!); v(!)) d(!), for all (u; v) 2 L1 (k ; X ) 
L1 (k+1 ; X ), the expected instantaneous utility at time k + 1. Therefore our
optimization problem is:
8 P1
< U (xb) = k=0 k+1 Jk+1 (xk ; xk+1 ) ! sup = m
>
(1) s.t. (x (!); x (!)) 2 Fk+1 (!) -a.e., k 2 N0
: x (!) k= v(!)k+1
>
-a.e. (i.e. xb 2 H (v)):
0
196 N.S. Papageorgiou, F. Papalini, S. Vercillo

The corresponding nite horizon approximation to it is the following problem:

8 P
< UN (xbN ) = Nk=0 k+1 Jk+1 (xk ; xk+1 ) ! sup = mN
>
(2) s.t. (x (!); x (!)) 2 Fk+1 (!) -a.e., k 2 f0; 1; 2; : : :N g
: x (!) k= v(!)k+1
>
-a.e. (i.e. xb 2 H (v)):
0 N N
The precise mathematical hypotheses on the data of our model are the following:
H(1): Fk :
! 2X X , k  1 is a multifunction with nonempty, closed and
convex values and GrFk = f(!; x; y) 2
 X  X : (x; y) 2 Fk (!)g 2
k  B (X )  B (X ) (graph measurability of Fk (
));

H(2): uk :
 X  X ! R = R [ f 1g, k  1, is an integrand such that
(i) (!; x; y) 7! uk (!; x; y) is k  B (X )  B (X )-measurable,
(ii) (x; y) 7! uk (!; x; y) is concave and u.s.c.,
(iii) uk (!; x; y)  '(!; kxk; kyk) -a.e. with ' :
 R+  R+ ! R+
1 +
Rmeasurable, '(!;
;
) is nondecreasing and for all r1 ; r2 2 L (
; R )

'(!; r1 (!); r2 (!)) d(! ) < +1;
P k+1  < 1 and for any
H(3): there exists a sequence k  0 such that 1 k=0 k+1
xbN 2 HN (v) we have Jk+1 (xk ; xk+1 )  k+1 for all k 2 f0; 1; 2; : : :; N g;

H(4): for every k 2 N0 and every M 2 R, there exists ck+1 (M )(
) 2 L1 (k+1 ; R)
such that for all N  k and all xbN 2 HN (v) for which we have M <
P N n+1 Jn+1 (xn ; xn+1 ), we have kx (!)k  c (M )(!) -a.e.
n=0 k+1 k+1
Hypothesis H(1) is a very general one. Note that I. Evstigneev [9] and M.I. Tak-
sar [14] assumed that Gk (!)  K for all (k; !) 2 N0 
with K being a xed
compact and convex subset of Rm (in their model the commodity space was Rm ).
Also they assumed that (0; 0) 2 Fk (!) for all (k; !) 2 N0 
(possibility of
inaction). On the other hand, N.S. Papageorgiou [12] (who had an innite di-
mensional space) assumed the free disposability hypothesis (i.e. if (x; y) 2 Fk (!)
and x  x0 , y0  y then (x0 ; y0 ) 2 Fk (!); see hypothesis H(P)(3), [12, p. 229]).
In this work we do not need such hypotheses. Note that the convexity on the
sets Fk (!) follows from the well-known \law of diminishing returns", while the
closedness hypothesis on the sets Fk (!) is primarily a mathematical one, which is
though consistent with economic principles and very common in models of growth
theory.
Hypothesis H(2) is also very general and incorporates many cases existing in
the relevant growth theory literature. In contrast to I. Evstigneev [9] we do
not assume that uk (!;
;
) is continuous. Also our growth hypothesis H(2)(iii) is
considerably more general than that of M.I. Taksar [14], where it is assumed that
juk (!; x; y)j  k for all (!; x; y) 2
 X  X with k  0 such that Pk0 k <
 Growth with uncertainty 197
1, and also incorporates the growth hypothesis employed by N.S. Papageorgiou
[12] (cf. hypothesis H(u)(3) in [12]). None of above mentioned works covers the
case where the utility function goes to 1 as kxk; kyk ! 0. This is the case
if for example uk (!; x; y) = ak (!) ln kx yk with ak 2 L1(k ; R), ak  0 or
uk (!; x; y) = ak (!)kx yk, 0 <  < 1, ak 2 L1(k ; R), ak  0.
Hypothesis H(3) will enable us to establish some bounds for feasible programs
of (2) and eventually show that mN ! m as N ! 1. This hypothesis is automati-
cally satised in the context of the models of I. Evstigneev [9], M.I. Taksar [14],
Kravvaritis-Papageorgiou [10] and N.S. Papageorgiou [12] because of the stronger
requirements that they imposed on Fk (!) and uk (!; x; y).
Finally hypothesis H(4) is very mild indeed, since the bounding function de-
pends on (k; !) 2 N0 
.
By wseq we will denote the topology on L1(k ; X ), k 2 N0 , whose closed sets
are the sequentially weakly closed in L1 (k ; X ) (this is indeed a topology; see
G. Buttazzo [5, pp. 8{9]). In general wseq is stronger than the weak topology on
L1 (k ; X ). From the Eberlein-Smulian theorem we know that these two topolo-
gies coincide on weakly compact subset of L1 (k ; X ). Also note that wseq is rst
countable.
Finally if Z is a Banach space and v : Z ! R = R [ f 1g is a concave
function, the directional derivative of v(
) at z 2 Z is dened by
g0 (z ; h) = lim+ v(z + h) v(z ) :
!0
Note that because of the concavity of v(
),  ! v(z+h) v(z) is an increasing
function and so the limit in the above denition makes sense.
3. Existence result
In this section we prove an existence result for problem (1) and we also show
that its values can be obtained as the limit of the values of the nite horizon
problems (2).
Theorem 1. If hypotheses H(1), H(2), H(3) and H(4) hold and m > 1 then
problem (1) admits a solution and furthermore mN ! m as N ! 1.
Proof: We start by observing that under our assumptions the function U is well
posed. Moreover note that because of hypothesis H(3) we have that
X1
m k+1 k+1 < 1:
k=0
Since by hypothesis 1 < m, given " > 0 we can nd zb = fzk gk0 2 H (v) such
that 1
X
1 < m " < k+1 Jk+1(zk ; zk+1)  m < 1:
k=0
198 N.S. Papageorgiou, F. Papalini, S. Vercillo

Hence fk+1Jk+1 (zk ; zk+1)g is a summable sequence in R and so

1
X N
X
k +1
 Jk+1(zk ; zk+1) = Nlim k+1 Jk+1 (zk ; zk+1 ):
k=0 !1 k=0
Let zbN be the nite sequence obtained from zb by stopping at N + 1. Clearly then
zbN = fzk gNk=0
+1 2 H (v ). So we have
N
N
X
k+1 Jk+1 (zk ; zk+1 )  mN
k=0
N
X 1
X
) Nlim
!1
k+1 Jk+1 (zk ; zk+1) = k+1 Jk+1(zk ; zk+1)  lim inf m
N !1 N
k=0 k=0
) m "  lim inf m :
N !1 N
Since " > 0 was arbitrary, we get
(3) m  lim inf m :
N !1 N
Next let w = lim supN !1 mN and let Nn ! 1 be such that

w n1 < mN n

(its existence follows from the denition of lim supN !1 mN = w). Hence for
each n  1 we can nd zb n = fzkngkN=0+1 2 HN (v) such that
n
n

N
X
w n1 < k+1 Jk+1 (zkn; zkn+1 ):
n

k=0
Let M = w n1 and for each k 2 N0 dene VK +1 = fy 2 L1 (k+1 ; X ) :
ky(!)k  ck+1(M )(!) -a.e.g. Since X is re exive, from Dunford's theorem
1
Q 1, p. 101])Qwe have1 that VK +1 is wseq -compact in L (k+1 ; X ).
(cf. [7, Theorem
Let V = k0 VK +1  k0 L (k+1 ; X ). Then from Tichonov's theorem
V equipped with the product wseq -topology is compact and in fact sequentially
this topology on V
compact (cf. [8, Theorem 3.6, p. 230]). Incidentally note that Q
coincides with the relative weak topology on V as a subset of k0 L1 (k+1 ; X )
(cf. [6, p. 43]). Then let xb n = fxnkgk0 2 fvg  V be dened by
 zn for k 2 f0; 1; 2; : : :; Nn + 1g
xnk = k
0; otherwise.
 Growth with uncertainty 199
Then we can nd a subsequence fxb n gi0 of fxb ngn1 such that xn ! x in
i i

fvg  V equipped with the product wseq -topology. From the properties of the
product topology (cf. [8]) we have xnk ! xk in Vk furnished with the wseq -topology,
for every k 2 f0; 1; : : : g. Using Theorem 3.1 of [11] we deduce that xb  2 H (v).
Next we claim that for every k 2 N0 , Jk+1 (
;
) is weakly-u.s.c. on L1 (k ; X ) 
1
L (k+1 ; X ). To this end we need to show that for every  2 R, L = f(x; y) 2
L1 (k ; X )  L1(k+1 ; X ) :   Jk+1 (x; y)g is weakly closed. Note that because of
hypothesis H(2)(ii) L is convex. So L is weakly closed if and only if it is strongly
closed. Thus let f(xn ; yn)gn1 be a sequence in L such that (xn ; yn ) ! (x; y)
in L1 (k ; X )  L1 (k+1 ; X ).
As a by-product of completeness of the Lebesgue-Bochner spaces (cf. [4, The-
orem 17.11, p. 378]) we know that we can nd a subsequence f(xn ; yn )gi1 such
that (xn (!); yn (!)) ! (x(!); y(!)) -a.e. in X  X and kxn (!)k  a1 (!),
i i

kyn (!)k  a2 (!) -a.e., for all i  1, with a1 ; a2 2 L1 (

; R+). Then because of
i i i

i
hypothesis H(2)(iii) we have
uk+1(!; xn (!); yn (!))  '(!; a1 (!); a2 (!)) -a.e.
i i

and Z
'(!; a1 (!); a2 (!)) d(!) < 1:

So we can apply Fatou's lemma and since by hypothesis H(2)(ii) uk+1(!;
;
) is

u.s.c., we obtain that
Z Z
lim sup uk+1 (!; xn (!); yn (!)) d(!)  uk+1(!; x(!); y(!)) d(!)
i!1

i i

) lim sup Jk+1 (xn ; yn )  Jk+1 (x; y)

i!1
i i

)   Jk+1 (x; y); i.e. (x; y) 2 L :

Therefore Jk+1 (
;
) is weakly-u.s.c. on L1 (k ; X )  L1 (k+1 ; X ). Hence if for
economy in the notation we denote xb n = fxnk gk0 by xb i = fxik gk0, we have
i i

lim sup Jk+1 (xik ; xik+1 )  Jk+1 (xk ; xk+1 ):

i!1
Now dene a following sequence in R:
 J (xi ; xi ) if 0  k  Nn = Ni
Rki +1 = k+1 k k+1 i

0; otherwise,
for all i 2 N0 . Then we have
lim sup Rki +1  Jk+1 (xk ; xk+1 )
i!1
200 N.S. Papageorgiou, F. Papalini, S. Vercillo

and by hypothesis H(3) Rki +1  k+1 for all k 2 N0 . Hence via Fatou's lemma
we get, recalling that xb  2 H (v):
X X
lim sup k+1 Rki +1  k+1 Jk+1 (xk ; xk+1 )  m
i!1 k0 k 0
N
X
k+1 Jk+1 (xk ; xk+1 )  m
i

) lim sup
i!1 k=0
(4) X
) w i!1 lim n1  k+1 Jk+1 (xk ; xk+1 )  m
i k0
X
) lim sup mN  k+1 Jk+1 (xk ; xk+1 )  m:
N !1 k0
Combining inequalities (3) and (4) and recalling that xb  2 H (v) we conclude that
xb  is an optimal program and furthermore mN ! m as N ! 1. 
4. A transversality condition
In this section we present a primal (i.e. no dual variables (prices) are involved)
transversality condition for optimality.
In what follows by Jk0 +1 (xk ; xk+1 ; h1 ; h2 ) we will denote the directional deri-
vative of the concave functional Jk+1 (
;
) at the point (xk ; xk+1 ) 2 L1 (k ; X ) 
L1R(k+1 ; X ) in the direction (h1 ; h2 ) 2 L1 (k ; X )  L1 (k+1 ; X ). Furthermore
if
uk+1 (!; xk (!) + h1 (!); xk+1 (!) + h2 (!)) d(!) > 1 from the monotone
convergence theorem we get that
Z
J 0 (x ; x ; h1 ; h2 ) = u0 (!; x (!); x (!); h1 (!); h2 (!)) d(!)
k+1 k k+1 k+1 k k+1

with u0k+1(!; x; y; h1 ; h2 ) being the directional derivative of the concave function

uk+1(!;
;
) at the point (x; y) 2 X  X in the direction (h1 ; h2 ) 2 X  X .
We have the following necessary condition for optimality:
Theorem 2. If hypotheses H(1), H(2), H(3) and H(4) hold, m > 1 and
b  2 H (v) is an optimal program then for every xb 2 H (v) such that 1 <
xP
k+1
k0  Jk+1 (xk ; xk+1 ), we have that the real sequence
fk+1Jk0 +1 (xk ; xk+1 ; xk xk ; xk+1 xk+1 )gk0 is summable and
X
1 < k+1 Jk0 +1(xk ; xk+1 ; xk xk ; xk+1 xk+1 )
k0
X1 Z
= k+1 u0 (!; x (!); x (!);
k+1 k k+1
k=0

xk (!) xk (!); xk+1 (!) xk+1 (!)) d(!)  0:

 Growth with uncertainty 201
P
Proof: Let xb 2 H (v) be such that 1 < k0 k+1Jk+1 (xk ; xk+1 ). For
 2 (0; 1) dene xb  = fxk gk0 by xk = (1 )xk + xk for all k 2 N0 . Clearly
xb  2 H (v). From the concavity of Jk+1 (
;
) (cf. hypothesis H(2)(ii)) we have
k+1 (Jk+1 (xk ; xk+1 ) Jk+1 (xk ; xk+1 ))
k+1
   (Jk+1 (xk ; xk+1 ) Jk+1 (xk ; xk+1 )); k 2 N0 ;
X
) k+1 Jk+1 (xk ; xk+1 ) Jk+1 (xk ; xk+1 ))
k0
X k+1 1 h i
   Jk+1 (xk ; xk+1 ) Jk+1 (xk ; xk+1 )  0;
k0
the last inequality being a consequence of the optimality of xb  . In the above
inequality the left hand side is bigger than 1 (hence nite) because of the
choice of xb 2 H (v). On the right hand side apply Fatou's lemma to get
X h i
1 < lim sup k+1 1 Jk+1 (xk ; xk+1 ) Jk+1 (xk ; xk+1 )
!0 k0
X h i
 k+1 lim sup 1 Jk+1 (xk ; xk+1 ) Jk+1(xk ; xk+1 )
k 0 !0
X k+1 0  
=  Jk+1 (xk ; xk+1 ; xk xk ; xk+1 xk+1 )
k 0
X k+1 Z 0  
=  u (!; xk (!); xk+1 (!);
k0
k+1
xk (!) xk (!); xk+1 (!) xk+1 (!)) d(!)  0:

Acknowledgment. The authors wish to thank a knowledgeable referee whose
remarks and corrections helped them to improve the paper.
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Nikolaos S. Papageorgiou:
National Technical University, Department of Mathematics, Zografou Campus,
Athens 15780, Greece

Francesca Papalini, Susanna Vercillo:

Department of Mathematics, Perugia University, Via Vanvitelli 1, Perugia, 06123,
Italy

(Received March 20, 1995, revised June 6, 1996)