Journal
JOURNAL OF ECONOMIC DYNAMICS & CONTROL
Volume 75, Issue -, Pages 91-113Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.jedc.2016.12.001
Keywords
Time inconsistency; Self-coordination; Two-tier planner-doer game framework; Commitment by punishment; Cost of self-coordination; Dynamic mean-variance formulation
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Funding
- Research Grants Council of Hong Kong [414513, 419511]
- National Natural Science Foundation of China [71201094, 71671106, 71601107]
- Shanghai Pujiang Program [15PJC051]
- State Key Program in the Major Research Plan of National Natural Science Foundation of China [91546202]
- Program for Changjiang Scholars and Innovative Research Team in SUFE Grant [IRT13077]
- Patrick Huen Wing Ming Chair Professorship of Systems Engineering and Engineering Management
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Time inconsistency has been a thorny issue in many economic and financial decision making problems, especially when risk measures are involved in performance criteria. We develop in this paper a two-tier planner-doer game framework with self-coordination. By aligning the global interest of the planner and the local interests of the doers by applying suitable penalty functions, a degree of internal harmony (measured quantitatively by the expected cost of self-coordination) can be achieved by the self-coordination policy. We establish an axiom system for modified preferences, under which the self-coordination policy can be obtained by solving a corresponding optimization problem. We then apply our game framework successfully in dynamic mean-variance portfolio selection. (C) 2016 Elsevier B.V. All rights reserved.
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