The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Recursive Contracts

  • Albert Marcet
Reference work entry


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.


Bellman equation Commitment Contract theory Debt constraints Dynamic programming Incentive constraints International capital flows Lagrange multipliers Optimal fiscal policy Optimal monetary policy Optimal taxation Participation constraints Principal and agent Private information Ramsey equilibria Recursive contracts Risk sharing Saddle point functional equations Time consistency Unemployment insurance 

JEL Classifications

D4 D10 
This is a preview of subscription content, log in to check access.


  1. Abraham, A., and E. Carceles-Poveda. 2006. Endogenous incomplete markets, enforcement constraints, and intermediation. Theoretical Economics 1: 439–459.Google Scholar
  2. Abraham, A., and N. Pavoni. 2005. The efficient allocation of consumption under moral hazard and hidden access to the credit market. Journal of the European Economic Association 3: 370–381.CrossRefGoogle Scholar
  3. Abreu, D., D. Pierce, and E. Stachetti. 1990. Towards a theory of discounted repeated games with imperfect monitoring. Econometrica 58: 1041–1063.CrossRefGoogle Scholar
  4. Aiyagari, R., A. Marcet, T.J. Sargent, and J. Seppälä. 2002. Optimal Taxation without state-contingent debt. Journal of Political Economy 110: 1220–1254.CrossRefGoogle Scholar
  5. Alvarez, F., and U.J. Jermann. 2000. Efficiency, equilibrium, and asset pricing with risk of default. Econometrica 68: 775–798.CrossRefGoogle Scholar
  6. Attanasio, O., and J.V. Ríos-Rull. 2000. Consumption smoothing in island economies: Can public insurance reduce welfare? European Economic Review 44: 1225–1258.CrossRefGoogle Scholar
  7. Chang, R. 1998. Credible monetary policy with long-lived agents: Recursive approaches. Journal of Economic Theory 81: 431–461.CrossRefGoogle Scholar
  8. Cooley, T.F., R. Marimon, and V. Quadrini. 2004. Aggregate consequences of limited contract enforceability. Journal of Political Economy 112: 817–847.CrossRefGoogle Scholar
  9. Ferrero, G., and A. Marcet. 2004. Limited commitment and temporary exclusion. Mimeo, Institut d’Analisi Economica, CSIC.Google Scholar
  10. Golosov, M., N.R. Kocherlakota, and A. Tsyvinski. 2003. Optimal indirect and capital taxation. Review of Economic Studies 70: 569–587.CrossRefGoogle Scholar
  11. Hopenhayn, H.A., and J.P. Nicolini. 1997. Optimal unemployment insurance. Journal of Political Economy 105: 412–438.CrossRefGoogle Scholar
  12. Judd, K.L., S. Yeltekin, and J. Conklin. 2003. Computing supergame equilibria. Econometrica 71: 1239–1254.CrossRefGoogle Scholar
  13. Kehoe, P.J., and F. Perri. 2002. International business cycles with endogenous incomplete markets. Econometrica 70: 907–928.CrossRefGoogle Scholar
  14. King, R.G., A. Kahn, and A.L. Wolman. 2003. Optimal monetary policy. Review of Economic Studies 70: 825–860.CrossRefGoogle Scholar
  15. Kocherlakota, N.R. 1996. Implications of efficient risk sharing without commitment. Review of Economic Studies 63: 595–609.CrossRefGoogle Scholar
  16. Kydland, F.E., and E.C. Prescott. 1977. Rules rather than discretion: The inconsistency of optimal plans. Journal of Political Economy 85: 473–492.CrossRefGoogle Scholar
  17. Marcet, A., and R. Marimon. 1992. Communication, commitment and growth. Journal of Economic Theory 58: 219–249.CrossRefGoogle Scholar
  18. Marcet, A., and R. Marimon. 1998. Recursive contracts. Working paper, Universitat Pompeu Fabra.Google Scholar
  19. Phelan, C., and E. Stacchetti. 2001. Sequential equilibria in a Ramsey tax model. Econometrica 69: 1491–1518.CrossRefGoogle Scholar
  20. Phelan, C., and R.M. Townsend. 1991. Computing multi-period, information-constrained optima. Review of Economic Studies 58: 853–881.CrossRefGoogle Scholar
  21. Scholl, A. 2004. Do endogenous incomplete markets explain cross-country consumption correlations and the dynamics of the terms of trade? Berlin: Mimeo, Humboldt University.Google Scholar
  22. Scott, A. 2007. Optimal taxation and OECD labor taxes. Journal of Monetary Economics 54: 925–944.CrossRefGoogle Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Albert Marcet
    • 1
  1. 1.