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On Time Inconsistency: A Technical Issue in Stackelberg Differential Games

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Author Info
Danyang Xie (Hong Kong University of Science & Technology)

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Abstract

Stackelberg differential games are useful settings in which optimal government policies can be studied. This paper argues that the analysis of these games involves a key technical issue. In particular, we question the necessity for optimality of one boundary condition invoked in existing literature. The issue is of key interest because the boundary condition is largely responsible for the time inconsistency results previously obtained. We show that the boundary condition is not necessary in some cases. As a result, our finding undermines the credibility of the existing conclusions. Forthcoming 1997: Journal of Economic Theory.

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Paper provided by EconWPA in its series Macroeconomics with number 0212004.

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Length: 30 pages
Date of creation: 11 Dec 2002
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Handle: RePEc:wpa:wuwpma:0212004

Note: Type of Document - PDF; prepared on PC; to print on HP; pages: 30 ; figures: none
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Keywords: Time Inconsistency Stackelberg Differential Game

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Find related papers by JEL classification:
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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  1. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93. [Downloadable!] (restricted)
    Other versions:
  2. Benveniste, L. M. & Scheinkman, J. A., 1982. "Duality theory for dynamic optimization models of economics: The continuous time case," Journal of Economic Theory, Elsevier, vol. 27(1), pages 1-19, June. [Downloadable!] (restricted)
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  4. Xie, Danyang, 1991. "Increasing Returns and Increasing Rates of Growth," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 429-35, April. [Downloadable!] (restricted)
  5. Persson, Mats & Persson, Torsten & Svensson, Lars E O, 1987. "Time Consistency of Fiscal and Monetary Policy," Econometrica, Econometric Society, vol. 55(6), pages 1419-31, November. [Downloadable!] (restricted)
  6. Calvo, Guillermo A & Obstfeld, Maurice, 1990. "Time Consistency of Fiscal and Monetary Policy: A Comment," Econometrica, Econometric Society, vol. 58(5), pages 1245-47, September. [Downloadable!] (restricted)
  7. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May. [Downloadable!] (restricted)
  8. Chamley, Christophe, 1985. "Efficient Taxation in a Stylized Model of Intertemporal General Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 451-68, June. [Downloadable!] (restricted)
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  10. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, vol. 46(6), pages 1411-28, November. [Downloadable!] (restricted)
  11. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June. [Downloadable!] (restricted)
  12. Calvo, Guillermo A & Guidotti, Pablo E, 1992. "Optimal Maturity of Nominal Government Debt: An Infinite-Horizon Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(4), pages 895-919, November. [Downloadable!] (restricted)
  13. Benhabib, Jess & Rustichini, Aldo, 1997. "Optimal Taxes without Commitment," Journal of Economic Theory, Elsevier, vol. 77(2), pages 231-259, December. [Downloadable!] (restricted)
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  14. Xie Danyang, 1994. "Divergence in Economic Performance: Transitional Dynamics with Multiple Equilibria," Journal of Economic Theory, Elsevier, vol. 63(1), pages 97-112, June. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. R. Cellini & L. Lambertini & G. Leitmann, 2004. "Perfect Uncontrollable Differential Games," Working Papers 509, Dipartimento Scienze Economiche, Università di Bologna. [Downloadable!]
  2. Ngo Van Long & Koji Shimomura, 2000. "Semi-Stationary Equilibrium in Leader-Follower Games," CIRANO Working Papers 2000s-08, CIRANO. [Downloadable!]
  3. R. Cellini & L. Lambertini, 2003. "The issue of time inconsistency revisited as an extended game," Working Papers 489, Dipartimento Scienze Economiche, Università di Bologna. [Downloadable!]
  4. Pierre-Daniel G. Sarte, 2006. "Stark optimal fiscal policies and sovereign lending," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 337-352. [Downloadable!]
  5. Jorge Soares, Marina Azzimonti, Pierre-Daniel Sarte & Pierre-Daniel Sarte & Jorge Soares, 2006. "Optimal Policy and (the Lack of) Time Inconsistency: Insights from Simple Models," Working Papers 06-08, University of Delaware, Department of Economics. [Downloadable!]
  6. R. Cellini & L. Lambertini, 2004. "Time consistent fiscal policies in a Ramsey economy," Working Papers 522, Dipartimento Scienze Economiche, Università di Bologna. [Downloadable!]
    Other versions:
  7. Larry Karp & Thierry Paul, 2002. "Intersectoral Adjustment and Policy Intervention: the Importance of General Equilibrium Effects," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series 893R, Department of Agricultural & Resource Economics, UC Berkeley. [Downloadable!]
    Other versions:
  8. R. Cellini & L. Lambertini & G. Leitmann, 2005. "Degenerate Feedback and Time Consistency in Dynamic Games," Working Papers 535, Dipartimento Scienze Economiche, Università di Bologna. [Downloadable!]
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