E ¢ cient Allocations with Moral Hazard and Hidden Borrowing and Lending : A Recursive Formulation

@inproceedings{brahm2008EC,
  title={E ¢ cient Allocations with Moral Hazard and Hidden Borrowing and Lending : A Recursive Formulation},
  author={{\'A}rp{\'a}d {\'A}brah{\'a}m},
  year={2008}
}
We propose a tractable recursive framework to study the optimal allocation of consumption and e¤ort 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 …rst order approach, whose validity must be veri…ed ex-post. Thanks to the recursive formulation of the optimal contract, the veri…cation procedure turns out to be numerically parsimonious as it can be performed using standard dynamic… CONTINUE READING

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