Advanced Search
MyIDEAS: Login

Efficient Allocations with Moral Hazard and Hidden Borrowing and Lending: A Recursive Formulation

Contents:

Author Info

  • Arpad Abraham

    (University of Rochester)

  • Nicola Pavoni

    (University College London)

Abstract

We propose a tractable recursive framework to study the optimal allocation of consumption and effort in a dynamic setting with moral hazard where agents have secret access to the credit market or to storage. The recursive structure is based on a generalized first order approach, whose validity must be verified ex-post. Thanks to the recursive formulation of the optimal contract, the verification procedure turns out to be numerically parsimonious as it can be performed using standard dynamic programming techniques with only one endogenous state variable: The agent's level of assets. We study the performance of our ex-post verification test in practice by solving numerically three representative infinite horizon examples. (Copyright: Elsevier)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://dx.doi.org/10.1016/j.red.2008.05.001
Download Restriction: Access to full texts is restricted to ScienceDirect subscribers and institutional members. See http://www.sciencedirect.com/ for details.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 11 (2008)
Issue (Month): 4 (October)
Pages: 781-803

as in new window
Handle: RePEc:red:issued:06-26

Contact details of provider:
Postal: Review of Economic Dynamics Academic Press Editorial Office 525 "B" Street, Suite 1900 San Diego, CA 92101
Fax: 1-314-444-8731
Email:
Web page: http://www.EconomicDynamics.org/review.htm
More information through EDIRC

Order Information:
Email:
Web: http://www.EconomicDynamics.org/RED17.htm

Related research

Keywords: Moral hazard; Hidden savings; Efficiency; Recursive contracts; First-order approach; Ex post verification;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Harold L Cole & Narayana Kocherlakota, 2010. "Efficient Allocations with Hidden Income and Hidden Storage," Levine's Working Paper Archive 1909, David K. Levine.
  2. Chiappori, Pierre-Andre & Macho, Ines & Rey, Patrick & Salanie, Bernard, 1994. "Repeated moral hazard: The role of memory, commitment, and the access to credit markets," European Economic Review, Elsevier, vol. 38(8), pages 1527-1553, October.
  3. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
  4. Atila Abdulkadiroglu & Burhanettin Kuruscu & Aysegul Sahin, 2002. "Unemployment Insurance and the Role of Self-Insurance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 681-703, July.
  5. Phelan, C. & Townsend, R.M., 1990. "Computing Multiperiod, Information-Constrained Optima," University of Chicago - Economics Research Center 90-13, Chicago - Economics Research Center.
  6. Marcus Hagedorn & Ashok Kaul, 2004. "An Adverse Selection Model of Optimal Unemployment Insurance," Computing in Economics and Finance 2004 154, Society for Computational Economics.
  7. Gary D. Hansen & Ayse Imrohoroglu, 1990. "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," UCLA Economics Working Papers 583, UCLA Department of Economics.
  8. Rustichini, Aldo, 1998. "Dynamic Programming Solution of Incentive Constrained Problems," Journal of Economic Theory, Elsevier, vol. 78(2), pages 329-354, February.
  9. Townsend, Robert M, 1982. "Optimal Multiperiod Contracts and the Gain from Enduring Relationships under Private Information," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1166-86, December.
  10. Mikhail Golosov, 2007. "Optimal Taxation With Endogenous Insurance Markets," The Quarterly Journal of Economics, MIT Press, vol. 122(2), pages 487-534, 05.
  11. Atkeson, Andrew, 1991. "International Lending with Moral Hazard and Risk of Repudiation," Econometrica, Econometric Society, vol. 59(4), pages 1069-89, July.
  12. Kenneth L. Judd & Sevin Yeltekin & James Conklin, 2003. "Computing Supergame Equilibria," Econometrica, Econometric Society, vol. 71(4), pages 1239-1254, 07.
  13. Nicola Pavoni & Arphad Abraham, 2004. "First Order Approach for Principal-Agent Models with Hidden Borrowing and Lending: The Two Period Case," 2004 Meeting Papers 572, Society for Economic Dynamics.
  14. Ábrahám, Árpád & Koehne, Sebastian & Pavoni, Nicola, 2011. "On the first-order approach in principal-agent models with hidden borrowing and lending," Journal of Economic Theory, Elsevier, vol. 146(4), pages 1331-1361, July.
  15. Harold L. Cole & Narayana R. Kocherlakota, 1997. "Dynamic games with hidden actions and hidden states," Working Papers 583, Federal Reserve Bank of Minneapolis.
  16. Fernandes, Ana & Phelan, Christopher, 2000. "A Recursive Formulation for Repeated Agency with History Dependence," Journal of Economic Theory, Elsevier, vol. 91(2), pages 223-247, April.
  17. Drew Fudenberg & Bengt Holmstrom & Paul Milgrom, 1987. "Short-Term Contracts and Long-Term Agency Relationships," Working papers 468, Massachusetts Institute of Technology (MIT), Department of Economics.
  18. Narayana Kocherlakota, 2010. "Figuring out the impact of hidden savings on optimal unemployment insuranc," Levine's Working Paper Archive 506439000000000291, David K. Levine.
  19. Alberto Bisin & Adriano Rampini, 2006. "Exclusive contracts and the institution of bankruptcy," Economic Theory, Springer, vol. 27(2), pages 277-304, January.
  20. Bizer, David S. & DeMarzo, Peter M., 1999. "Optimal Incentive Contracts When Agents Can Save, Borrow, and Default," Journal of Financial Intermediation, Elsevier, vol. 8(4), pages 241-269, October.
  21. Chang, Roberto, 1998. "Credible Monetary Policy in an Infinite Horizon Model: Recursive Approaches," Journal of Economic Theory, Elsevier, vol. 81(2), pages 431-461, August.
  22. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September.
  23. Christopher Phelan & Ennio Stacchetti, 1999. "Sequential equilibria in a Ramsey tax model," Staff Report 258, Federal Reserve Bank of Minneapolis.
  24. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
  25. Mitchell, Matthew & Zhang, Yuzhe, 2010. "Unemployment Insurance with Hidden Savings," MPRA Paper 23214, University Library of Munich, Germany.
  26. Cronshaw, Mark B, 1997. "Algorithms for Finding Repeated Game Equilibria," Computational Economics, Society for Computational Economics, vol. 10(2), pages 139-68, May.
  27. Abraham Arpad & Nicola Pavoni, 2004. "Efficient Allocations, with Moral Hazard and Hidden Borrowing and Lending," Levine's Bibliography 122247000000000138, UCLA Department of Economics.
  28. Matthias Doepke & Robert M. Townsend, 2002. "Dynamic Mechanism Design With Hidden Income and Hidden Actions," UCLA Economics Working Papers 818, UCLA Department of Economics.
  29. In-Uck Park, 2004. "Moral Hazard Contracting and Private Credit Markets," Econometrica, Econometric Society, vol. 72(3), pages 701-746, 05.
  30. Allen, Franklin, 1985. "Repeated principal-agent relationships with lending and borrowing," Economics Letters, Elsevier, vol. 17(1-2), pages 27-31.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Arantxa Jarque, 2008. "Repeated moral hazard with effort persistence," Working Paper 08-04, Federal Reserve Bank of Richmond.
  2. Alexander K. Karaivanov & Fernando M. Martin, 2011. "Dynamic optimal insurance and lack of commitment," Working Papers 2011-029, Federal Reserve Bank of St. Louis.
  3. Matthias Messner & Nicola Pavoni & Christopher Sleet, 2012. "Recursive Methods for Incentive Problems," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(4), pages 501-525, October.
  4. Julien Prat, 2011. "Dynamic Incentive Contracts Under Parameter Uncertainty," 2011 Meeting Papers 249, Society for Economic Dynamics.
  5. Łukasz Balbus & Kevin Reffett & Łukasz Woźny, 2013. "Markov Stationary Equilibria in Stochastic Supermodular Games with Imperfect Private and Public Information," Dynamic Games and Applications, Springer, vol. 3(2), pages 187-206, June.
  6. Ábrahám, Árpád & Koehne, Sebastian & Pavoni, Nicola, 2011. "On the first-order approach in principal-agent models with hidden borrowing and lending," Journal of Economic Theory, Elsevier, vol. 146(4), pages 1331-1361, July.
  7. Alexander Karaivanov & Robert M. Townsend, 2014. "Dynamic Financial Constraints: Distinguishing Mechanism Design From Exogenously Incomplete Regimes," Econometrica, Econometric Society, vol. 82(3), pages 887-959, 05.
  8. Árpád Ábrahám & Sarolta Laczó, 2013. "Efficient Risk Sharing with Limited Commitment and Storage," Working Papers 697, Barcelona Graduate School of Economics.
  9. Alexander K. Karaivanov & Fernando M. Martin, 2011. "Moral hazard and lack of commitment in dynamic economies," Working Papers 2011-030, Federal Reserve Bank of St. Louis.
  10. Sarolta Laczo & Arpad Abraham, 2012. "Efficient Risk Sharing with Limited Commitment and Hidden Saving," 2012 Meeting Papers 680, Society for Economic Dynamics.
  11. Messner Matthias & Pavoni Nicola & Sleet Christopher, . "Recursive Methods for Dynamic Incentive Problems," GSIA Working Papers 2012-E13, Carnegie Mellon University, Tepper School of Business.
  12. Mitchell, Matthew & Zhang, Yuzhe, 2010. "Unemployment Insurance with Hidden Savings," MPRA Paper 23214, University Library of Munich, Germany.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:red:issued:06-26. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.