The recursive approach to time inconsistency

Andrew Caplin, John Leahy

    Research output: Contribution to journalArticlepeer-review

    Abstract

    We introduce a new class of finite horizon stochastic decision problems in which preferences change over time, and provide a proof of the existence of a recursively optimal strategy. Recursive optimization techniques dominate many areas of economic dynamics. However, in decision problems in which tastes change over time, the solution technique most commonly applied is not recursive, but rather strategic (subgame perfection). In this paper we argue in favor of the recursive approach, and we take the necessary theoretical steps to make the recursive methodology applicable.

    Original languageEnglish (US)
    Pages (from-to)134-156
    Number of pages23
    JournalJournal of Economic Theory
    Volume131
    Issue number1
    DOIs
    StatePublished - Nov 2006

    Keywords

    • Consistent plans
    • Subgame perfection
    • Time consistency

    ASJC Scopus subject areas

    • Economics and Econometrics

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