Strong and weak equilibria for time-inconsistent stochastic control in continuous time
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Publication:5000641
DOI10.1287/MOOR.2020.1066zbMATH Open1476.93160arXiv1809.09243OpenAlexW2893747554MaRDI QIDQ5000641FDOQ5000641
Publication date: 15 July 2021
Published in: Mathematics of Operations Research (Search for Journal in Brave)
Abstract: A new definition of continuous-time equilibrium controls is introduced. As opposed to the standard definition, which involves a derivative-type operation, the new definition parallels how a discrete-time equilibrium is defined, and allows for unambiguous economic interpretation. The terms "strong equilibria" and "weak equilibria" are coined for controls under the new and the standard definitions, respectively. When the state process is a time-homogeneous continuous-time Markov chain, a careful asymptotic analysis gives complete characterizations of weak and strong equilibria. Thanks to Kakutani-Fan's fixed-point theorem, general existence of weak and strong equilibria is also established, under additional compactness assumption. Our theoretic results are applied to a two-state model under non-exponential discounting. In particular, we demonstrate explicitly that there can be incentive to deviate from a weak equilibrium, which justifies the need for strong equilibria. Our analysis also provides new results for the existence and characterization of discrete-time equilibria under infinite horizon.
Full work available at URL: https://arxiv.org/abs/1809.09243
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continuous-time Markov chainstochastic controltime-inconsistencyweak equilibriastrong equilibrianonexponential discounting
Applications of continuous-time Markov processes on discrete state spaces (60J28) Reliability, availability, maintenance, inspection in operations research (90B25) Discrete-time control/observation systems (93C55) Optimal stochastic control (93E20)
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