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

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Kodritsch, Sebastian

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Corporate Editor Wissenschaftszentrum Berlin für Sozialforschung gGmbH
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. (author's abstract)
Keywords time; consistency; equilibrium; well-being; behavior; decision
Classification Social Psychology; Basic Research, General Concepts and History of Economics
Document language English
Publication Year 2015
City Berlin
Page/Pages 21 p.
Series Discussion Papers / Wissenschaftszentrum Berlin für Sozialforschung, Forschungsschwerpunkt Markt und Entscheidung, Abteilung Verhalten auf Märkten, SP II 2015-201
Status Published Version; reviewed
Licence Deposit Licence - No Redistribution, No Modifications