Recursive Methods for Incentive Problems

Abstract

Many separable dynamic incentive problems have primal recursive formulations in which utility promises serve as state variables. We associate families of dual recursive problems with these by selectively dualizing constraints. We make transparent the connections between recursive primal and dual approaches, relate value iteration under each and give conditions for such value iteration to be convergent to the true value function.

Keywords: Dynamic Contracts, Duality, Dynamic Programming

JEL Classification: C61, C73, D82, D86, E61