Recursive contracts

Albert Marcet and Ramon Marimon

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

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).

Keywords: Time inconsistency; recursive formulation; dynamic programming; Ramsey equilibrium; participation constraint; recursive saddle points (search for similar items in EconPapers)
JEL-codes: C61 C63 (search for similar items in EconPapers)
Date: 1994-09, Revised 1998-10
New Economics Papers: this item is included in nep-dge and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (81)

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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:337

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