Equilibria of time‐inconsistent stopping for one‐dimensional diffusion processes

Erhan Bayraktar, Zhenhua Wang and Zhou Zhou

Mathematical Finance, 2023, vol. 33, issue 3, 797-841

Abstract: We consider three equilibrium concepts proposed in the literature for time‐inconsistent stopping problems, including mild equilibria (introduced in Huang and Nguyen‐Huu (2018)), weak equilibria (introduced in Christensen and Lindensjö (2018)), and strong equilibria (introduced in Bayraktar et al. (2021)). The discount function is assumed to be log subadditive and the underlying process is one‐dimensional diffusion. We first provide necessary and sufficient conditions for the characterization of weak equilibria. The smooth‐fit condition is obtained as a by‐product. Next, based on the characterization of weak equilibria, we show that an optimal mild equilibrium is also weak. Then we provide conditions under which a weak equilibrium is strong. We further show that an optimal mild equilibrium is also strong under a certain condition. Finally, we provide several examples including one showing a weak equilibrium may not be strong, and another one showing a strong equilibrium may not be optimal mild.

Date: 2023
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https://doi.org/10.1111/mafi.12385

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Working Paper: Equilibria of Time-inconsistent Stopping for One-dimensional Diffusion Processes (2022)
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