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An augmented first-order approach for incentive problems

Research output: Working paper

Publication date28/05/2020
Place of PublicationLancaster
PublisherLancaster University, Department of Economics
<mark>Original language</mark>English

Publication series

NameEconomics Working Papers Series


Incentive constraints are constraints that are optimization problems themselves.
If these problems are non convex then the first order approach fails.
We propose an alternative solution method where we use the value function as an additional constraint.
This ensures that all solutions are incentive compatible.
To get the value function we use a function interpolator like sparse grids.
We demonstrate our approach by solving two examples from the literature were it was shown that the first order approach fails.