dynamic inconsistency

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A situation in which the optimal plan of a decision-maker made at one point in time is no longer optimal later in time. This can occur in game theory when a player wishes to change a chosen strategy during the play of the game. For example, a government may find it optimal to announce tight monetary policy to convince workers to accept low pay rises. Once low pay rises have been accepted the government may find it preferable to implement a loose monetary policy to boost output. Dynamic inconsistency also arises in behavioural economics where it is often termed ‘time inconsistency’. A decision-maker that is time inconsistent can be viewed as being formed from many different ‘selves’. Each self represents the decision-maker at a different point in time. Time inconsistency arises when the sequence of choices made by the separate selves are different from the choice planned by the initial self.

Subjects: Economics.

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