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Time-consistent stopping under decreasing impatience

Arrêt temporellement cohérent sous impatience décroissante

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 [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: Time-inconsistency; Optimal Stopping; Decreasing impatience; Hyperbolic discounting; subgame perfect equilibrium; sequential game (search for similar items in EconPapers)
Date: 2017-03-08
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Journal Article: Time-consistent stopping under decreasing impatience (2018) Downloads
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