Recursive Contracts and Endogenously Incomplete Markets

Mikhail Golosov, Aleh Tsyvinski and Nicolas Werquin

Chapter Chapter 10 in Handbook of Macroeconomics, 2016, vol. 2, pp 725-841 from Elsevier

Abstract: In this chapter we study dynamic incentive models in which risk sharing is endogenously limited by the presence of informational or enforcement frictions. We comprehensively overview one of the most important tools for the analysis such problems—the theory of recursive contracts. Recursive formulations allow us to reduce often complex models to a sequence of essentially static problems that are easier to analyze both analytically and computationally. We first provide a self-contained treatment of the basic theory: the Revelation Principle, formulating and simplifying the incentive constraints, using promised utilities as state variables, and analyzing models with persistent shocks using the first-order approach. We then discuss more advanced topics: duality theory and Lagrange multiplier techniques, models with lack of commitment, and martingale methods in continuous time. Finally, we show how a variety of applications in public economics, corporate finance, development and international economics featuring incomplete risk sharing can be analyzed using the tools of the theory of recursive contracts.

Keywords: Principal–agent model; Dynamic mechanism design; Recursive contracts; Private information; Limited commitment; Incomplete markets; Revelation Principle; Promised utility; First-order approach; Hidden storage; Lagrangian; Continuous time contracts; A33; C61; D52; D82; D86; H21 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1574004816000082
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Recursive Contracts and Endogenously Incomplete Markets (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:macchp:v2-725

DOI: 10.1016/bs.hesmac.2016.03.007

Access Statistics for this chapter

More chapters in Handbook of Macroeconomics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().