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Recursive Contracts

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The New Palgrave Dictionary of Economics

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Abstract

A number of dynamic models in economics are formulated with forward-looking elements in the constraints – for example, models of risk-sharing with participation constraints and models of optimal policy. Here, standard dynamic programming does not apply. Recent contributions show how to reformulate these models by either rewriting the forward-looking constraints (promised utility approach) or by using a Lagrangean formulation (recursive Lagrangean). Both make it possible to obtain a recursive formulation that allows for easier computation and analytical results. A number of applications can be found to optimal fiscal or monetary policy, risk sharing or investment with various financial constraints, and employment decisions.

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Authors and Affiliations

  1. http://link.springer.com/referencework/10.1057/978-1-349-95121-5

    Albert Marcet

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  1. Albert Marcet
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Marcet, A. (2018). Recursive Contracts. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_2597

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