Title: Recursive Contracts
Series/Report no.: EUI MWP; 2011/03
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.
Subject: Recursive methods; dynamic optimization; Ramsey equilibrium; time inconsistency; limited participation; contract default; saddle-points; Lagrangian multipliers
Type of Access: openAccess