Paper #337
- Title:
- Recursive contracts
- Authors:
- Albert Marcet and Ramon Marimon
- Date:
- September 1994 (Revised: October 1998)
- 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
- JEL codes:
- C61, C63
- Area of Research:
- Macroeconomics and International Economics
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