IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

How Should Control Theory be Used by a Time-Consistent Government?

Listed author(s):
  • Cohen, Daniel
  • Michel, Philippe

It has been recognized that the optimal strategy of a government is generally time-inconsistent: optimality requires that the government take into account expectations effects in the formulation of its policy and to ignore these effects when applying the policy. In order to analyse the problem, we study different solutions to a simple one-dimensional linear quadratic game. The optimal but time-inconsistent solution appears to be paradoxical: in the long term, the government plays against its objective function, in order to induce the private sector to take early corrective measures. The time-consistent solution, by contrast, is defined as a solution to the Hamilton-Jacobi-Bellman equation, i.e. as a policy where the government has no-precommitment capability. We demonstrate that this solution can be obtained by imposing the assumption that the government does not take into account the private sector's first order conditions but instead takes as given an equilibrium feedback rule. This solution is compared to a policy where the government has an "instantaneous" precommitment, to a Cournot-Nash equilibrium and to an optimal policy rule. In each case, we show how control theory should or should not be applied to calculate the equilibrium.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 141.

in new window

Date of creation: Dec 1986
Handle: RePEc:cpr:ceprdp:141
Contact details of provider: Postal:
Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.

Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820

Order Information: Email:

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:141. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.