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A note on the welfare of a sophisticated time-inconsistent decision-maker

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  • Kodritsch, Sebastian

Abstract

I examine the circumstances under which a sophisticated time-inconsistent decisionmaker (i) will not or (ii) need not severely miscoordinate her behavior across time, in the sense of following a course of action which fails to be Pareto-optimal for the sequence of temporal selves of the individual (Laibson [1994] and O'Donoghue and Rabin [1999] provide prominent instances of such miscoordination). Studying the standard solution concept for this case - Strotz-Pollak equilibrium - in general decision problems with perfect information, I establish two results: first, for finite-horizon problems without indifference, essential consistency (Hammond [1976]) is sufficient for choice to be Pareto-optimal. Second, if the decision problem satisfies a certain history-independence property, whenever an equilibrium outcome fails to be Pareto-optimal, it is Pareto-dominated by another equilibrium outcome, leading to an existence result for a Pareto-optimal solution.

Suggested Citation

  • Kodritsch, Sebastian, 2015. "A note on the welfare of a sophisticated time-inconsistent decision-maker," Discussion Papers, Research Unit: Market Behavior SP II 2015-201, WZB Berlin Social Science Center.
    • Handle: RePEc:zbw:wzbmbh:spii2015201
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    References listed on IDEAS

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    3. Goldman, Steven Marc, 1979. "Intertemporally Inconsistent Preferences and the Rate of Consumption," Econometrica, Econometric Society, vol. 47(3), pages 621-626, May.
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    5. B. Douglas Bernheim & Debraj Ray & Şevin Yeltekin, 2015. "Poverty and Self‐Control," Econometrica, Econometric Society, vol. 83(5), pages 1877-1911, September.
    6. Piccione, Michele & Rubinstein, Ariel, 1997. "On the Interpretation of Decision Problems with Imperfect Recall," Games and Economic Behavior, Elsevier, vol. 20(1), pages 3-24, July.
    7. Steven M. Goldman, 1980. "Consistent Plans," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 47(3), pages 533-537.
    8. Per Krusell & Anthony A. Smith, Jr., 2003. "Consumption--Savings Decisions with Quasi--Geometric Discounting," Econometrica, Econometric Society, vol. 71(1), pages 365-375, January.
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    10. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 443-478.
    11. Harris, Christopher J, 1985. "Existence and Characterization of Perfect Equilibrium in Games of Perfect Information," Econometrica, Econometric Society, vol. 53(3), pages 613-628, May.
    12. R. H. Strotz, 1955. "Myopia and Inconsistency in Dynamic Utility Maximization," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 23(3), pages 165-180.
    13. Bezalel Peleg & Menahem E. Yaari, 1973. "On the Existence of a Consistent Course of Action when Tastes are Changing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 40(3), pages 391-401.
    14. Ferdinand M. Vieider & Clara Villegas-Palacio & Peter Martinsson & Milagros Mejía, 2016. "Risk Taking For Oneself And Others: A Structural Model Approach," Economic Inquiry, Western Economic Association International, vol. 54(2), pages 879-894, April.
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    Cited by:

    1. Onur Kesten & Morimitsu Kurino & Alexander S. Nesterov, 2017. "Efficient lottery design," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 48(1), pages 31-57, January.

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    More about this item

    Keywords

    time-inconsistency; multi-selves approach; Strotz-Pollak equilibrium; welfare; Pareto-optimality;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D60 - Microeconomics - - Welfare Economics - - - General
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General

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