Computing Moral-Hazard Problems Using the Dantzig-Wolfe Decomposition Algorithm

Working Paper 98-6

Posted: 10 Sep 1998

See all articles by Edward S. Prescott

Edward S. Prescott

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Multiple version iconThere are 2 versions of this paper

Date Written: June 1998

Abstract

Linear programming is an important method for computing solutions to private information problems. The method is applicable for arbitrary specifications of the preferences and technology. Unfortunately, as the cardinality of underlying sets increases the programs quickly become too large to compute. This paper demonstrates that moral-hazard problems have a structure that allows them to be computed using the Dantzig-Wolfe decomposition algorithm. This algorithm breaks the linear program into subproblems, greatly increasing the size of problems that may be practically computed. Connections to dynamic programming are discussed. Two examples arecomputed. Role of lotteries is discussed.

JEL Classification: C63, D82

Suggested Citation

Prescott, Edward (Ned) Simpson, Computing Moral-Hazard Problems Using the Dantzig-Wolfe Decomposition Algorithm (June 1998). Working Paper 98-6. Available at SSRN: https://ssrn.com/abstract=111293

Edward (Ned) Simpson Prescott (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

P.O. Box 6387
Cleveland, OH 44101
United States

HOME PAGE: http://https://www.clevelandfed.org/people-search?pid=f8ca941e-4b51-41f6-95f8-c87f1d3806e5

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