Abstract
The transversality condition for an infinite horizon dynamic optimization problem is the boundary condition determining a solution to the problem’s first-order conditions together with the initial condition. The transversality condition requires the present value of the state variables to converge to zero as the planning horizon recedes towards infinity. The first-order and transversality conditions are sufficient to identify an optimum in a concave optimization problem. Given an optimal path, the necessity of the transversality condition reflects the impossibility of finding an alternative feasible path for which each state variable deviates from the optimum at each time and increases discounted utility.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Bibliography
Becker, R.A., and J.H. Boyd. 1997. Capital theory, equilibrium analysis, and recursive utility. Malden: Blackwell Publishers.
Benveniste, L.M., and J.A. Schienkman. 1982. Duality theory for dynamic optimization models of economics: The continuous time case. Journal of Economic Theory 27: 1–19.
Gray, J.A. and S.W. Salant 1983. Transversality conditions in infinite horizon models. Working paper, Washington State University.
Kamihigashi, T. 2005. Necessity of the transversality condition for stochastic models with bounded or CRRA utility. Journal of Economic Dynamics and Control 29: 1313–1329.
LeRoy, S.F. 2004. Rational exuberance. Journal of Economic Literature 41: 783–804.
Malinvaud, E. 1953. Capital accumulation and efficient allocation of resources. Econometrica 21: 233–268.
Michel, P. 1982. On the transversality condition in infinite horizon optimal problems. Econometrica 50: 975–986.
Mirman, L.J., and I. Zilcha. 1975. Optimal growth under uncertainty. Journal of Economic Theory 11: 329–339.
Weitzman, M.L. 1973. Duality theory for infinite horizon convex models. Management Science 19: 783–789.
Weitzman, M.L. 2003. Income, wealth, and the maximum principle. Cambridge, MA: Harvard University Press.
Author information
Authors and Affiliations
Editor information
Copyright information
© 2018 Macmillan Publishers Ltd.
About this entry
Cite this entry
Becker, R.A. (2018). Transversality Condition. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_2158
Download citation
DOI: https://doi.org/10.1057/978-1-349-95189-5_2158
Published:
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-95188-8
Online ISBN: 978-1-349-95189-5
eBook Packages: Economics and FinanceReference Module Humanities and Social SciencesReference Module Business, Economics and Social Sciences