An augmented first-order approach for incentive problems

Philipp Renner

No 297498586, Working Papers from Lancaster University Management School, Economics Department

Abstract: Incentive constraints are constraints that are optimization problems themselves. If these problems are non convex then the first order approach fails. We propose an alternative solution method where we use the value function as an additional constraint. This ensures that all solutions are incentive compatible. To get the value function we use a function interpolator like sparse grids. We demonstrate our approach by solving two examples from the literature were it was shown that the first order approach fails.

Keywords: incentive constraints; first order approach; parametric optimization; value function approach (search for similar items in EconPapers)
JEL-codes: C63 D80 D82 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-mic and nep-ore
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