Reference : Optimal Switching from Competition to Cooperation: A Preliminary Exploration
Parts of books : Contribution to collective works
Business & economic sciences : Quantitative methods in economics & management
Optimal Switching from Competition to Cooperation: A Preliminary Exploration
Boucekkine, Raouf []
Camacho, Carmen []
Zou, Benteng mailto [University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Department of Economics and Management (DEM) >]
Dynamic economic problems with regime switches
Haunschmied, Josef
Kovacevic, Raimund
Semmler, Willi
Veliov, Vladimir
Dynamic Modeling and Econometrics in Economics and Finance 25
[en] In this paper, we tackle a generic optimal regime switching problem where the decision
making process is not the same from a regime to another. Precisely, we consider a simple
model of optimal switching from competition to cooperation. To this end, we solve a twostage
optimal control problem. In the first stage, two players engage in a dynamic game
with a common state variable and one control for each player. We solve for open-loop
strategies with a linear state equation and linear-quadratic payoffs. More importantly, the
players may also consider the possibility to switch at finite time to a cooperative regime
with the associated joint optimization of the sum of the individual payoffs. Using theoretical
analysis and numerical exercises, we study the optimal switching strategy from
competition to cooperation. We also discuss the reverse switching.

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