Time Consistency in Alternating-Move Policy Games

22 Pages Posted: 4 Sep 2005

See all articles by In-Koo Cho

In-Koo Cho

University of Illinois at Urbana-Champaign

Akihiko Matsui

University of Tokyo - Faculty of Economics

Abstract

We examine alternating-move policy games where the government and the private sector alternate their moves. In contrast with the standard policy game, the set of equilibrium payoffs of the present model is bounded away from the payoff under the one-shot Nash equilibrium, called the Kydland-Prescott outcome, and the upper bound is close to the payoff under the optimal policy (called the Ramsey policy) if the government is sufficiently patient. In other words, the Kydland-Prescott outcome is not time consistent, while the Ramsey outcome could be approximated by a time-consistent policy of the same game.

Suggested Citation

Cho, In-Koo and Matsui, Akihiko, Time Consistency in Alternating-Move Policy Games. Japanese Economic Review, Vol. 56, No. 3, pp. 273-294, September 2005. Available at SSRN: https://ssrn.com/abstract=785428

In-Koo Cho (Contact Author)

University of Illinois at Urbana-Champaign ( email )

410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States

Akihiko Matsui

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan

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