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Self-coordination in time inconsistent stochastic decision problems: A planner–doer game framework

Xiangyu Cui, Duan Li and Yun Shi

Journal of Economic Dynamics and Control, 2017, vol. 75, issue C, 91-113

Abstract: Time inconsistency has been a thorny issue in many economic and financial decision making problems, especially when risk measures are involved in performance criteria. We develop in this paper a two-tier planner–doer game framework with self-coordination. By aligning the global interest of the planner and the local interests of the doers by applying suitable penalty functions, a degree of internal harmony (measured quantitatively by the expected cost of self-coordination) can be achieved by the self-coordination policy. We establish an axiom system for modified preferences, under which the self-coordination policy can be obtained by solving a corresponding optimization problem. We then apply our game framework successfully in dynamic mean-variance portfolio selection.

Keywords: G11; C7; Time inconsistency; Self-coordination; Two-tier planner–doer game framework; Commitment by punishment; Cost of self-coordination; Dynamic mean-variance formulation (search for similar items in EconPapers)
Date: 2017
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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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