Proof.

Let {:U"} be a converging subsequence, {(u"', urn)} be the corr

esponding
sequence of dual variables of SDI". We suppose that proper subsequence
s have
been chosen so that {(u m, v')} is also convergent (Lemma 6) and not
e .2"~' and
(u ~, u '~) as the limit points.
The proof follows the steps of O'Neill. Consider some proposal (xT',
(7~'~")~si~))
generated at cycle m by the subproblem SD~. We have for all q/> m +
1,
[ q -1 -m
which simply expresses the optimality of the subproblem SDqp(~ (if thi
s relation
were not true, it could be shown using the reasoning of Lemma 1 tha
t the activity
level of that proposal in SD%,) should be increased). This condition
holds for all
nodes differing from the terminal ones (i ~ L,,(1)). The following re
lations derive
from Lemma 4. We have for i~ L,,(1) and at cycle m:
c, y u2)x?= * " - 6 (u,, [C,)
a~A(i)
When i~ L,(1), but is not equal to l, the relation becomes:
9 t;~| /31 t?l
=~s [(u,,,u,D(,~)lc]+ 2 ",.
s~S(i)
rtl trl m ~ m
x, =x,, /z, =h,, soS(l), x,- ........ =Xs~.~, s~S(1),
t?l , ,'71 171
/Zs =/l s ~,p(~.).
Lemma 6. {u m, v m } belongs to a compact set and there exists a subseq
uence converging
at(u ~-, ,, ).
Proof. Because v~'(e,s for e,~:c B we have, using Theorem 24.5 of
Rockafellar [ 1970],
~v?(O) ~ ~vT(o) + n~
where 7? is a positive number.
B is the ball previously defined. ~v,~(0) is a compact set because 0
is in the interior
of the effective domain of the function which proves the theorem. We ca
n now state
the convergence theorem.
Theorem. Any cluster point of the sequence generated by the algorithm
is an optimal
solution to the problem.
ci- uqi x~"+ 2 ~"_ r (U~Di~)~X~ h, <~v q, q>~m+l,
ac (i) s~S(i) a~A(i)
(4)
The dual of D is obtained by modifying the x
which is equal to the expression appearing in the profitability criter
ion.
Because the directional derivative is positive, increasing him from 0
to some small
positive value will lend to an increase in the objective function val
ue. This will be
afortiori true if we let h,, vary freely in the optimization.
Nested decomposition provides a feasible solution at each cycle of pha
se 2,
provided we keep all proposals of each subproblem in each cycle. The
procedure
for constructing this solution is an immediate generalization of the on
e given in Ho
(1974) or O'Neill (1976); it can be stated as follows. Let $'--(~7',
i~ T) be the
solution at cycle m. We consider at some node s, the sequence of pr
oposals
In order to introduce our formulation of the dual n-stage stochastic p
rogramming
problem, we consider the following schematic economic planning problem.
We
consider a multisector economy, which in each period can adapt the te
chnology of
its new capital stock and its activity levels. Let ~, designate a ve
ctor, which is on a
one to one correspondence with the technology structure of new equipment
in period
t and u~ be the vector of activity levels. Let ut = (u, .... , u,)
and ~'t = (sr~,
9 .., ~',) be
the vectors relative to the decisions up to stage t. We consider the fo
llowing economic
problem (EP):
Problem EPIt is easy to see that each constraint i of this program
(1) involves xi and all
vector variables x,~, d c D(i) and requires them to belong to a conv
ex set. We further
assume that each C~ is a compact set which does not derive from dua
lizing EP. As
in O'Neill, the assumption is mainly introduced for stating the conver
gence proof.
This assumption, although restrictive in some problems, can be natural
in others.
The numerical examples given in Section 5 are general equilibrium mode
ls where
only relative price matters. It is possible, in general, to restate t
hese problems in
such a way that the relative prices belong to compact sets. Needless
to say the same
need not be true with partial equilibrium models.
" hi'" m'
constructed at cycle m'= 1,..., m and designate by X~' the vector
(x~,..., xT).
Let A ~ be the matrix "~ "
(h~,... - ....
, h~ ), dlmensloned m x rn (A~ is an upper triangular
matrix). The construction of a feasible (see Lemma 2) solution at cyc
le m is then
stated as follows:
--
The last relation holds for i = l:
c,x? + E "'' "
s~S(l) ~c-S(I)