transversality condition

Robert A. Becker
From The New Palgrave Dictionary of Economics, Second Edition, 2008
Edited by Steven N. Durlauf and Lawrence E. Blume
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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.
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How to cite this article

Becker, Robert A. "transversality condition." The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan, 2008. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan. 23 September 2017 <http://www.dictionaryofeconomics.com/article?id=pde2008_T000218> doi:10.1057/9780230226203.1736

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