Finite horizon optimum control with and without a scrap value

In this paper, we study the effects of scrap values on the solutions of optimal control problems with finite time horizon. We show how to include a scrap value, either for the state variables or for the state and the control variables, in the OPTCON2 algorithm for the optimal control of dynamic economic systems. We ask whether the introduction of a scrap value can serve as a substitute for an infinite horizon in economic policy optimization problems where the latter option is not available. Using a simple numerical macroeconomic model, we demonstrate that the introduction of a scrap value cannot induce control policies which can be expected for problems with an infinite time horizon.