Time Inconsistency and the Theory of Second Best

Brian Hillier

Scottish Journal of Political Economy, 1989, vol. 36, issue 3, 253-65

Abstract: The welfare implications of time inconsistency are examined and related to the theory of second best using a simple two period model. The economy is populated by identical individuals, whose welfare is the concern of a government confronting public good and externality problems. Necessary, but not sufficient, conditions for time inconsistency to occur are shown to be that the government does not have enough instruments to achieve the first best allocation, and that, under laissez-faire, selfish optimization would lead to a "prisoners' dilemma" and a collectively inefficient outcome. Copyright 1989 by Scottish Economic Society.

Date: 1989
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