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Recursive Contracts

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  • Albert Marcet
  • Ramon Marimon

Abstract

We obtain a recursive formulation for a general class of contracting problems involving incentive constraints. These constraints make the corresponding maximization sup problems non-recursive. Our approach consists of studying a recursive Lagrangian. Under standard general conditions, there is a recursive saddle-point (infsup) functional equation (analogous to a Bellman equation) that characterizes the recursive solution to the planner's problem and forward-looking constraints. Our approach has been applied to a large class of dynamic contractual problems, such as contracts with limited enforcement, optimal policy design with implementability constraints, and dynamic political economy models.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2011/15.

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Date of creation: 2011
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Handle: RePEc:eui:euiwps:eco2011/15

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Keywords: Recursive methods; dynamic optimization; Ramsey equilibrium; time inconsistency; limited participation; contract default; saddle-points; Lagrangian multipliers.;

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