A time-inconsistent Dynkin game: from intra-personal to inter-personal equilibria |
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Authors: | Huang Yu-Jui Zhou Zhou |
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Institution: | 1.Department of Applied Mathematics, University of Colorado, Boulder, CO, 80309-0526, USA ;2.School of Mathematics and Statistics, University of Sydney, Sydney, NSW, 2006, Australia ; |
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Abstract: | This paper studies a nonzero-sum Dynkin game in discrete time under non-exponential discounting. For both players, there are two intertwined levels of game-theoretic reasoning. First, each player looks for an intra-personal equilibrium among her current and future selves, so as to resolve time inconsistency triggered by non-exponential discounting. Next, given the other player’s chosen stopping policy, each player selects a best response among her intra-personal equilibria. A resulting inter-personal equilibrium is then a Nash equilibrium between the two players, each of whom employs her best intra-personal equilibrium with respect to the other player’s stopping policy. Under appropriate conditions, we show that an inter-personal equilibrium exists, based on concrete iterative procedures along with Zorn’s lemma. To illustrate our theoretical results, we investigate a two-player real options valuation problem where two firms negotiate a deal of cooperation to initiate a project jointly. By deriving inter-personal equilibria explicitly, we find that coercive power in negotiation depends crucially on the impatience levels of the two firms. |
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