Recursive Contracts

Albert Marcet and Ramon Marimon

No ECO2011/15, Economics Working Papers from European University Institute

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.

Keywords: Recursive methods; dynamic optimization; Ramsey equilibrium; time inconsistency; limited participation; contract default; saddle-points; Lagrangian multipliers. (search for similar items in EconPapers)
JEL-codes: C61 C63 D58 E27 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (76)

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