School of Economics and Finance

No. 677: A Generalized Endogenous Grid Method for Non-concave Problems

Giulio Fella , Queen Mary, University of London

May 1, 2011

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This paper extends Carroll's (2006) endogenous grid method and its combination with value function iteration by Barillas and Fernández-Villaverde (2007) to non-concave problems. The method is illustrated using a consumer problem in which consumers choose both durable and non-durable consumption. The durable choice is discrete and subject to non-convex adjustment costs. The algorithm yields substantial gains in accuracy and computational time relative to value function iteration, the standard solution choice for non-concave problems.

J.E.L classification codes: C63

Keywords:Endogenous grid method, Non-concavity