The solution to an impulse control problem motivated by optimal harvesting

Abstract

We consider a stochastic impulse control problem that is motivated by applications such as the optimal exploitation of a natural resource. In particular, we consider a stochastic system whose uncontrolled state dynamics are modelled by a non-explosive positive linear diffusion. The control that can be applied to this system takes the form of one-sided impulsive action. The objective of the control problem is to maximise a discounted performance criterion that rewards the effect of control action but involves a fixed cost at each time of a control intervention. We derive the complete solution to this problem under general assumptions. It turns out that the solution can take four qualitatively different forms, several of which have not been observed in the literature. In two of the four cases, there exist only ε-optimal control strategies. We also show that the boundary classification of 0 may play a critical role in the solution of the problem. Furthermore, we develop a way for establishing the strong solution to a stochastic impulse control problem's optimally controlled SDE.