diff --git a/src/library/compiler/CMakeLists.txt b/src/library/compiler/CMakeLists.txt
index 83a253ebf2..187bda1ea3 100644
--- a/src/library/compiler/CMakeLists.txt
+++ b/src/library/compiler/CMakeLists.txt
@@ -1,3 +1,4 @@
 add_library(compiler OBJECT util.cpp eta_expansion.cpp simp_pr1_rec.cpp preprocess_rec.cpp
   compiler_step_visitor.cpp elim_recursors.cpp comp_irrelevant.cpp
-  inliner.cpp rec_fn_macro.cpp erase_irrelevant.cpp reduce_arity.cpp init_module.cpp)
+  inliner.cpp rec_fn_macro.cpp erase_irrelevant.cpp reduce_arity.cpp
+  lambda_lifting.cpp init_module.cpp)
diff --git a/src/library/compiler/lambda_lifting.cpp b/src/library/compiler/lambda_lifting.cpp
new file mode 100644
index 0000000000..f9dcbc155f
--- /dev/null
+++ b/src/library/compiler/lambda_lifting.cpp
@@ -0,0 +1,172 @@
+/*
+Copyright (c) 2016 Microsoft Corporation. All rights reserved.
+Released under Apache 2.0 license as described in the file LICENSE.
+
+Author: Leonardo de Moura
+*/
+#include "kernel/instantiate.h"
+#include "kernel/abstract.h"
+#include "kernel/for_each_fn.h"
+#include "kernel/inductive/inductive.h"
+#include "library/normalize.h"
+#include "library/util.h"
+#include "library/compiler/util.h"
+#include "library/compiler/erase_irrelevant.h"
+#include "library/compiler/compiler_step_visitor.h"
+
+namespace lean {
+class lambda_lifting_fn : public compiler_step_visitor {
+    buffer<pair<name, expr>> m_new_procs;
+    name                     m_prefix;
+    unsigned                 m_idx;
+
+    expr declare_aux_def(expr const & value) {
+        name aux_name = mk_fresh_name(env(), m_prefix, "_lambda", m_idx);
+        m_new_procs.emplace_back(aux_name, value);
+        return mk_constant(aux_name);
+    }
+
+    typedef rb_map<unsigned, local_decl, unsigned_rev_cmp> idx2decls;
+
+    void collect_locals(expr const & e, idx2decls & r) {
+        local_context const & lctx = m_ctx.lctx();
+        for_each(e, [&](expr const & e, unsigned) {
+                if (is_local_decl_ref(e)) {
+                    local_decl d = *lctx.get_local_decl(e);
+                    r.insert(d.get_idx(), d);
+                }
+                return true;
+            });
+    }
+
+    expr visit_lambda_core(expr const & e) {
+        type_context::tmp_locals locals(m_ctx);
+        expr t = e;
+        while (is_lambda(t)) {
+            lean_assert(is_neutral_expr(binding_domain(t)));
+            locals.push_local(binding_name(t), binding_domain(t), binding_info(t));
+            t = binding_body(t);
+        }
+        t = instantiate_rev(t, locals.size(), locals.data());
+        t = visit(t);
+        return locals.mk_lambda(t);
+    }
+
+    expr abstract_locals(expr e, buffer<expr> & locals) {
+        idx2decls map;
+        collect_locals(e, map);
+        if (map.empty()) {
+            return e;
+        } else {
+            while (!map.empty()) {
+                /* remove local_decl with biggest idx */
+                local_decl d = map.erase_min();
+                expr l       = d.mk_ref();
+                if (auto v = d.get_value()) {
+                    collect_locals(*v, map);
+                    e = instantiate(abstract_local(e, l), *v);
+                } else {
+                    locals.push_back(l);
+                    e = abstract_local(e, l);
+                    e = mk_lambda(d.get_name(), d.get_type(), e);
+                }
+            }
+            return e;
+        }
+    }
+
+    virtual expr visit_lambda(expr const & e) override {
+        expr new_e = visit_lambda_core(e);
+        buffer<expr> locals;
+        new_e  = abstract_locals(new_e, locals);
+        expr c = declare_aux_def(new_e);
+        return mk_rev_app(c, locals);
+    }
+
+    virtual expr visit_let(expr const & e) override {
+        type_context::tmp_locals locals(m_ctx);
+        expr t = e;
+        while (is_let(t)) {
+            lean_assert(is_neutral_expr(let_type(t)));
+            expr v = visit(instantiate_rev(let_value(t), locals.size(), locals.data()));
+            locals.push_let(let_name(t), let_type(t), v);
+            t = let_body(t);
+        }
+        t = instantiate_rev(t, locals.size(), locals.data());
+        t = visit(t);
+        return locals.mk_let(t);
+    }
+
+    expr visit_cases_on_minor(unsigned data_sz, expr e) {
+        type_context::tmp_locals locals(ctx());
+        for (unsigned i = 0; i < data_sz; i++) {
+            lean_assert(is_lambda(e));
+            expr l = locals.push_local_from_binding(e);
+            e = instantiate(binding_body(e), l);
+        }
+        e = visit(e);
+        return locals.mk_lambda(e);
+    }
+
+    /* We should preserve the lambda's in minor premises */
+    expr visit_cases_on_app(expr const & e) {
+        buffer<expr> args;
+        expr const & fn = get_app_args(e, args);
+        lean_assert(is_constant(fn));
+        name const & rec_name       = const_name(fn);
+        name const & I_name         = rec_name.get_prefix();
+        /* erase_irrelevant already removed parameters and indices from cases_on applications */
+        unsigned nminors            = *inductive::get_num_minor_premises(env(), I_name);
+        unsigned nparams            = *inductive::get_num_params(env(), I_name);
+        unsigned arity              = nminors + 1 /* major premise */;
+        unsigned major_idx          = 0;
+        unsigned first_minor_idx    = 1;
+        /* This transformation assumes eta-expansion have already been applied.
+           So, we should have a sufficient number of arguments. */
+        lean_assert(args.size() >= arity);
+        buffer<name> cnames;
+        get_intro_rule_names(env(), I_name, cnames);
+        /* Process major premise */
+        args[major_idx]        = visit(args[major_idx]);
+        /* Process extra arguments */
+        for (unsigned i = arity; i < args.size(); i++)
+            args[i] = visit(args[i]);
+        /* Process minor premises */
+        for (unsigned i = 0, j = first_minor_idx; i < cnames.size(); i++, j++) {
+            unsigned carity   = get_constructor_arity(env(), cnames[i]);
+            lean_assert(carity >= nparams);
+            unsigned cdata_sz = carity - nparams;
+            args[j] = visit_cases_on_minor(cdata_sz, args[j]);
+        }
+        return mk_app(fn, args);
+    }
+
+    virtual expr visit_app(expr const & e) override {
+        expr const & fn = get_app_fn(e);
+        if (is_constant(fn) && is_cases_on_recursor(env(), const_name(fn))) {
+            return visit_cases_on_app(e);
+        } else {
+            return compiler_step_visitor::visit_app(beta_reduce(e));
+        }
+    }
+
+public:
+    lambda_lifting_fn(environment const & env, name const & prefix):
+        compiler_step_visitor(env), m_prefix(prefix), m_idx(1) {
+    }
+
+    void operator()(buffer<pair<name, expr>> & procs) {
+        for (auto p : procs) {
+            expr val     = p.second;
+            expr new_val = is_lambda(val) ? visit_lambda_core(val) : visit(val);
+            m_new_procs.emplace_back(p.first, new_val);
+        }
+        procs.clear();
+        procs.append(m_new_procs);
+    }
+};
+
+void lambda_lifting(environment const & env, name const & prefix, buffer<pair<name, expr>> & procs) {
+    return lambda_lifting_fn(env, prefix)(procs);
+}
+}
diff --git a/src/library/compiler/lambda_lifting.h b/src/library/compiler/lambda_lifting.h
new file mode 100644
index 0000000000..9c60d36994
--- /dev/null
+++ b/src/library/compiler/lambda_lifting.h
@@ -0,0 +1,14 @@
+/*
+Copyright (c) 2016 Microsoft Corporation. All rights reserved.
+Released under Apache 2.0 license as described in the file LICENSE.
+
+Author: Leonardo de Moura
+*/
+#pragma once
+#include "kernel/environment.h"
+
+namespace lean {
+/** \brief Lift lambda expressions in \c procs. New declarations are added to procs.
+    \remark This procedure assumes erase_irrelevant was already applied. */
+void lambda_lifting(environment const & env, name const & prefix, buffer<pair<name, expr>> & procs);
+};
diff --git a/src/library/compiler/preprocess_rec.cpp b/src/library/compiler/preprocess_rec.cpp
index 99f509f32c..f891bac3a6 100644
--- a/src/library/compiler/preprocess_rec.cpp
+++ b/src/library/compiler/preprocess_rec.cpp
@@ -20,6 +20,7 @@ Author: Leonardo de Moura
 #include "library/compiler/elim_recursors.h"
 #include "library/compiler/erase_irrelevant.h"
 #include "library/compiler/reduce_arity.h"
+#include "library/compiler/lambda_lifting.h"
 
 namespace lean {
 class expand_aux_recursors_fn : public compiler_step_visitor {
@@ -132,6 +133,7 @@ public:
 
         erase_irrelevant(procs);
         reduce_arity(m_env, procs);
+        lambda_lifting(m_env, d.get_name(), procs);
 
         display(procs);
         // TODO(Leo)