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Repeated moral hazard and recursive Lagrangeans

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  • Mele, Antonio

Abstract

This paper shows how to solve dynamic agency models by extending recursive Lagrangean techniques a la Marcet and Marimon (2009) to problems with hidden actions. The method has many advantages with respect to promised utilities approach (Abreu, Pearce and Stacchetti (1990)): it is a significant improvement in terms of simplicity, tractability and computational speed. Solutions can be easily computed for hidden actions models with several endogenous state variables and several agents, while the promised utilities approach becomes extremely difficult and computationally intensive even with just one state variable or two agents. Several numerical examples illustrate how this methodology outperforms the standard approach.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 21741.

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Date of creation: 29 Mar 2010
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Handle: RePEc:pra:mprapa:21741

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Keywords: repeated moral hazard; recursive Lagrangean; collocation method;

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Cited by:
  1. Albert Marcet & Ramon Marimon, 1994. "Recursive contracts," Economics Working Papers 337, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 1998.
  2. Matthias Messner & Nicola Pavoni & Christopher Sleet, . "Contractive Dual Methods for Incentive Problems," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 2012-E26, Carnegie Mellon University, Tepper School of Business.
  3. Messner Matthias & Pavoni Nicola & Sleet Christopher, . "On the Dual Approach to Recursive Optimization," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 2012-E12, Carnegie Mellon University, Tepper School of Business.
  4. Charles Brendon, 2011. "Applying perturbation analysis to dynamic optimal tax problems," Economics Series Working Papers 581, University of Oxford, Department of Economics.
  5. Emilio Espino, 2012. "Investment and Insurance in an Economic Union," 2012 Meeting Papers, Society for Economic Dynamics 1176, Society for Economic Dynamics.

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