Singular stochastic control problems

Abstract. In this paper, we study an optimal singular stochastic control problem. By using a time transformation, this problem is shown to be equivalent to an auxiliary control problem defined as a combination of an optimal stopping problem and a classical control problem. For this auxiliary control problem, the controller must choose a stopping time (optimal stopping), and the new control variables belong to a compact set. This equivalence is obtained by showing that the (discontinuous) state process governed by a singular control is given by a time transformation of an auxiliary state process governed by a classical bounded control. It is proved that the value functions for these two problems are equal. For a general form of the cost, the existence of an optimal singular control is established under certain technical hypotheses. Moreover, the problem of approximating singular optimal control by absolutely continuous controls is discussed in the same class of admissible controls