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Efficient allocations with moral hazard and hidden borrowing and lending: A recursive formulation

Abraham, A; Pavoni, N; (2008) Efficient allocations with moral hazard and hidden borrowing and lending: A recursive formulation. REV ECON DYNAM , 11 (4) 781 - 803. 10.1016/j.red.2008.05.001. Green open access

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Abstract

We propose a tractable recursive framework to study the optimal allocation of consumption and effort in a dynamic setting with moral hazard where agents have secret access to the credit market or to storage. The recursive structure is based on a generalized first-order approach, whose validity must be verified ex post. Thanks to the recursive formulation of the optimal contract, the verification procedure turns out to be numerically parsimonious as it can be performed using standard dynamic programming techniques with only one endogenous state variable: The agent's level of assets. We study the performance of our ex post verification test in practice by solving numerically three representative infinite horizon examples. (c) 2008 Elsevier Inc. All rights reserved.

Type: Article
Title: Efficient allocations with moral hazard and hidden borrowing and lending: A recursive formulation
Open access status: An open access version is available from UCL Discovery
DOI: 10.1016/j.red.2008.05.001
Keywords: Moral hazard, Hidden savings, Efficiency, Recursive contracts, First-order approach, Ex post verification, PRINCIPAL-AGENT PROBLEMS, UNEMPLOYMENT-INSURANCE, OPTIMAL TAXATION, CREDIT MARKETS, CONTRACTS, MULTIPERIOD, INFORMATION, EQUILIBRIA, INCOME, GAMES
UCL classification: UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of SandHS > Dept of Economics
URI: http://discovery.ucl.ac.uk/id/eprint/17071
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