I am reading Chapter 20 (Insurance vs Incentive) in Sargent's Recursive Macroeconomics Theory.

I don't understand this part on his book (on page 809, 3rd version). Why we know that the optimal contract $c_s, w_s = g_1(.), l_1(.)$, not $g_2(.) l_2(.)$ for any state $s$? In particular, how can we make sure that the participation constraint is binding for all state?

If anyone has ever read this chapter and understand it. Plz kindly explain to me.

Thanks a lot!

enter image description here

  • $\begingroup$ Hi, it is unclear what about the formula is unclear. What have you tried doing to solve your problem so far? What is your understanding of the recursive formulation for this model? $\endgroup$ – Kitsune Cavalry Jan 10 at 1:38

Your Answer

By clicking "Post Your Answer", you acknowledge that you have read our updated terms of service, privacy policy and cookie policy, and that your continued use of the website is subject to these policies.

Browse other questions tagged or ask your own question.