The Optimal Equilibrium for Time-Inconsistent Stopping Problems---The Discrete-Time Case

Abstract

We study an infinite-horizon discrete-time optimal stopping problem under nonexponential discounting. A new method, which we call the iterative approach, is developed to find subgame perfect Nash equilibria. When the discount function induces decreasing impatience, we establish the existence of an equilibrium through fixed-point iterations. Moreover, we show that there exists a unique optimal equilibrium, which generates larger values than any other equilibrium does at all times. To the best of our knowledge, this is the first time a dominating subgame perfect Nash equilibrium is shown to exist in the literature of time-inconsistency.

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