Time-consistent stopping under decreasing impatience

Yu-Jui Huang and Adrien Nguyen-Huu
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Yu-Jui Huang: University of Colorado - Department of Applied Mathematics - University of Colorado [Boulder]

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Abstract: Under non-exponential discounting, we develop a dynamic theory for stopping problems in continuous time. Our framework covers discount functions that induce decreasing impatience. Due to the inherent time inconsistency, we look for equilibrium stopping policies, formulated as fixed points of an operator. Under appropriate conditions, fixed-point iterations converge to equilibrium stopping policies. This iterative approach corresponds to the hierarchy of strategic reasoning in game theory and provides "agent-specific" results: it assigns one specific equilibrium stopping policy to each agent according to her initial behavior. In particular, it leads to a precise mathematical connection between the naive behavior and the sophisticated one. Our theory is illustrated in a real options model.

Keywords: decreasing impatience; hyperbolic discounting; iterative approach; optimal stopping; subgame-perfect Nash equilibrium; time inconsistency (search for similar items in EconPapers)
Date: 2018-02
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Citations: View citations in EconPapers (18)

Published in Finance and Stochastics, 2018, 22 (1), pp.69--95. ⟨10.1007/s00780-017-0350-6⟩

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Journal Article: Time-consistent stopping under decreasing impatience (2018)
Working Paper: Time-consistent stopping under decreasing impatience (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01950058

DOI: 10.1007/s00780-017-0350-6

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