We present general recursive methods to handle environments where privately observed variables are linked over time. We show that incentive compatible contracts are implemented recursively with a threat keeping constraint in addition to the usual temporary incentive compatibility and promise keeping conditions. Journal of Economic Literature Classification Numbers: D30, D31, D80, D82.
Bibliographical noteFunding Information:
1The authors thank Fernando Alvarez, Robert E. Lucas, Jr., the associate editor, and two anonymous referees for comments. This paper was completed while Fernandes was a graduate student at the Department of Economics at the University of Chicago and she gratefully acknowledges financial support from Banco de Portugal and Fundacvo Para a Ciênca e a Tecnologia. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.
- Mechanism design; repeated agency