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Essays on time-inconsistency and bargaining

by Akin, Zafer

Abstract (Summary)
This thesis consists of three essays focusing on time inconsistency in a game theoretic framework. The first essay studies an equilibrium concept for both one and two player extensive form games. The equilibrium concept, by construction, embraces different bounded rationality approaches in one framework. A special case that examines the games played by potentially time-inconsistent agents is presented and naive backwards induction solution concept is specified. The second essay focuses on an alternating offers bargaining game between possibly time inconsistent players. The time inconsistency is modeled by quasi hyperbolic discounting and naive backwards induction solution concept is used in order to obtain the results. Both naive agents who remain naive and those who learn about their own preferences are considered. Offers of the players who are naive are never accepted by any type of player in both no learning and gradual learning cases. The game between a naive player who never learn and a time consistent agent ends in immediate agreement if the time consistent agent is the proposer. A one period delay occurs if time consistent agent is the responder. The more naive the player is, the higher share she gets. In addition, two naive agents who never learn disagree perpetually. When naive agents who are able to learn play against exponential or sophisticated agents, there exists a critical date before which there is no agreement. Therefore, the existence of time inconsistent players who can learn their types as they play the game can be a new explanation for delays in bargaining. The relationship among the degree of naivete, impatience level and bargaining delay is also characterized. The third essay examines the role of time inconsistency in intertemporal iniii vestment decisions. Quasi hyperbolic discounting framework is incorporated into a game including two stages, namely, self investment game and alternating offers bargaining game. We found that exponential and naive agents finish investment stage without any delay whereas sophisticated agents have a periodical investment schedule. In addition, there exists a threshold level of preference for immediate gratification that makes the sophisticated agent finish investment stage without any delay. When a bonus scheme is added, we showed that the amount of bonus should increase in order for naive agent to continue to invest and finish the investment stage. Moreover, the agents with higher self control problems should be given higher bonus in order to induce them to complete the same investment project. iv
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School:Pennsylvania State University

School Location:USA - Pennsylvania

Source Type:Master's Thesis

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