A diffusion model for the control of a dam

A previous paper [2] was concerned with the determination of optimal policies for restocking an inventory which is continuously depleted by a random process of demands. The purpose of the present paper is to develop a similar model for controlling the output of a dam whose random input depends on a homogeneous Wiener process. This reversal of the roles of input and output does not, by itself, change the character of the problem. But the consideration of set-up costs for ordering replacements, which leads to inventory policies of the (s, S) type, has no counterpart here. It is natural to regard the dam as a device for smoothing out random fluctuations in a flow of water and, under utility assumptions which reflect this attitude, it follows that the optimal output rate is a continuous function of the level of water in the reservoir. Our main object is to determine this function.