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Repeated moral hazard and recursive Lagrangeans

Listed author(s):
  • 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
Handle: RePEc:pra:mprapa:21741
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  11. Abraham, Arpad & Pavoni, Nicola, 2004. "Efficient Allocations with Moral Hazard and Hidden Borrowing and Lending," Working Papers 04-05, Duke University, Department of Economics.
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  17. Albert Marcet & Ramon Marimon, 1994. "Recursive contracts," Economics Working Papers 337, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 1998.
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  27. Tom Cooley & Sonia Di Giannatale & Gian Luca Clementi, 2008. "Total Executive Compensation," 2008 Meeting Papers 906, Society for Economic Dynamics.
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  39. repec:rim:rimwps:33-08 is not listed on IDEAS
  40. Clementi, Gian Luca & Cooley, Thomas F. & Wang, Cheng, 2006. "Stock grants as a commitment device," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 2191-2216, November.
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