A viability theory approach to a two-stage optimal control problem of technology adoption

Abstract

A new technology adoption problem can be modelled as a two-stage control problem, in which model parameters ("technology") might be altered at some time. An optimal solution to utility maximisation for this class of problems needs to contain information on the time, at which the change will take place (0, finite or never), along with the optimal control strategies before and after the change. For the change, or switch, to occur the "new technology" value function needs to dominate the "old technology" value function, after the switch. We charaterise the value function using the fact that its hypograph is a viability kernel of an auxiliary problem and we study when the graphs can intersect. If they do not, the switch cannot occur at a positive time. Using this characterisation we analyse a technology adoption problem and showmodels, for which the switch will occur at time zero or never.technology adoption, value function, viability kernel, viscosity solutions