Error Bounds for a Numerical Solution for Dynamic Economic Models

In this paper we analyze a discretized version of the dynamic programming algorithm for a parameterized family of infinite-horizon economic models, and derive error bounds for the approximate value and policy functions. If h is the mesh size of the discretization, then the approximation error for the value function is bounded by Mh^2, and the approximation error for the policy function is bounded by $Nh,$ where the constants $M$ and $N$ can be estimated from primitive data of the model.