A Negishi Approach to Recursive Contracts

Abstract

In this paper we argue that a large class of recursive contracts can be studied by means of the conventional Negishi method. A planner is responsible for prescribing current actions along with a distribution of future utility values to all agents, so as to maximize their weighted sum of utilities. Under convexity the method yields the exact efficient frontier. Otherwise the implementation re- quires contracts be contingent on publicly observable random signals uncorrelated to fundamentals. We compare our approach with the dual method established in the literature. Finally, considering maxmin-type social welfare functions, we clarify that the dynamics of efficient contracts can be ex- pressed as a stochastic evolution of welfare shares.