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Repeated moral hazard and recursive Lagrangeans

  • Mele, Antonio

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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File URL: https://mpra.ub.uni-muenchen.de/21741/2/MPRA_paper_21741.pdf
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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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  4. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
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  6. Hanno Lustig, 2004. "The Market Price of Aggregate Risk and the Wealth Distribution," UCLA Economics Online Papers 299, UCLA Department of Economics.
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  8. Malin, Benjamin A. & Krueger, Dirk & Kubler, Felix, 2011. "Solving the multi-country real business cycle model using a Smolyak-collocation method," Journal of Economic Dynamics and Control, Elsevier, vol. 35(2), pages 229-239, February.
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  19. Gian Luca Clementi & Thomas Cooley & Sonia Di Giannatale, 2008. "A Theory of Firm Decline," Working Paper Series 33-08, The Rimini Centre for Economic Analysis, revised Jan 2008.
  20. Kenneth L. Judd & Lilia Maliar & Serguei Maliar, 2010. "A Cluster-Grid Projection Method: Solving Problems with High Dimensionality," NBER Working Papers 15965, National Bureau of Economic Research, Inc.
  21. Sebastian Koehne & Nicola Pavoni & Arpad Abraham, 2010. "On the First-Order Approach in Principal-Agent Models with Hidden Borrowing and Lending," 2010 Meeting Papers 947, Society for Economic Dynamics.
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