On the Recursive Saddle Point Method

IGIER Working Paper No. 255

20 Pages Posted: 22 Feb 2004

See all articles by Matthias Messner

Matthias Messner

University of Cologne

Nicola Pavoni

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research; Centre for Economic Policy Research (CEPR)

Date Written: February 2004

Abstract

In this paper a simple dynamic optimization problem is solved with the help of the recursive saddle point method developed by Marcet and Marimon (1999). According to Marcet and Marimon, their technique should yield a full characterization of the set of solutions for this problem. We show though, that while their method allows us to calculate the true value of the optimization program, not all solutions with it admits are correct. Indeed, some of the policies which it generates as solutions to our problem, are either suboptimal or do not even satisfy feasibility. We identify the reasons underlying this failure and discuss its implications for the numerous existing applications.

Keywords: Recursive saddle point, recursive contracts, dynamic programming

JEL Classification: C61, C63

Suggested Citation

Messner, Matthias and Pavoni, Nicola, On the Recursive Saddle Point Method (February 2004). IGIER Working Paper No. 255, Available at SSRN: https://ssrn.com/abstract=505182 or http://dx.doi.org/10.2139/ssrn.505182

Matthias Messner (Contact Author)

University of Cologne ( email )

Albertus Magnus Platz
Cologne, NRW 50923
Germany

Nicola Pavoni

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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