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Recursive Contracts

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  • Albert Marcet and 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.

Suggested Citation

  • Albert Marcet and Ramon Marimon, 2011. "Recursive Contracts," Working Papers 552, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:552
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    References listed on IDEAS

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    More about this item

    Keywords

    Recursive methods; dynamic optimization; Ramsey equilibrium; time inconsistency; limited participation; contract default; saddle-points; Lagrangian multipliers;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications

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