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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. Under these constraints, the corresponding maximization (sup) problems fails to have a recursive solution. Our approach consists of studying the Lagrangian. We show that, under standard assumptions, the solution to the Lagrangian is characterized by a recursive saddle point (infsup) functional equation, analogous to Bellman's equation. Our approach applies to a large class of contractual problems. As examples, we study the optimal policy in a model with intertemporal participation constraints (which arise in models of default) and intertemporal competitive constraints (which arise in Ramsey equilibria).

Suggested Citation

  • Albert Marcet & Ramon Marimon, 1994. "Recursive contracts," Economics Working Papers 337, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 1998.
    • Handle: RePEc:upf:upfgen:337
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    More about this item

    Keywords

    Time inconsistency; recursive formulation; dynamic programming; Ramsey equilibrium; participation constraint; recursive saddle points;
    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

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    1. Recursive Macroeconomic Theory

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