Renegotiation and dynamic inconsistency: Contracting with non-exponential discounting

Cetemen, Doruk; Feng, Felix Zhiyu; Urgun, Can

doi:10.1016/j.jet.2023.105606

Cited by 6 publications

(3 citation statements)

References 82 publications

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“…In behavioural economics, the concept of time inconsistency (or dynamic inconsistency) refers to the tendency of individuals to place greater value on present payoffs or immediate decision-making conditions over future potential conditions [42,43]. In the field of political economics, policymakers often prioritise short-term conditions at the expense of long-term social welfare, leading to the selection of suboptimal policies [44]. Faccioli et al [45] conducted a study on subjects' social preference for environmental policies with long-term or very long-term outcomes using the contingent valuation method.…”

Section: Time Inconsistency In Decisionmakingmentioning

confidence: 99%

Time inconsistency in sustainable partner selection for vertical collaborative network organizations

Badulescu,

Soltan,

Hameri

et al. 2024

IET Collab Intel Manufact

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Collaborative Networked Organisations (CNOs) are increasingly recognised for their ability to harness cooperation and complementary competencies, outperforming individual efforts in pursuing business opportunities. However, the criticality of selecting the right long‐term partner for a CNO has been understated, especially considering the evolving landscape of sustainability perceptions. This research addresses the issue of time inconsistency within the context of sustainable CNO partner selection by employing the Fuzzy Analytical Hierarchical Process with the Technique for Order of Preference by Similarity to Ideal Solution. Time inconsistency refers to a situation where preferences or decisions change over different points in time, leading to inconsistencies in choices or actions. Specifically, the study focuses on a Swiss Manufacturing CNO, examining how the evaluation of potential partners' environmental criteria changes over time. The findings reveal the presence of time inconsistency in environmental criterion evaluation between two time periods. This inconsistency stems from the evolving perception of environmental conditions and the increasing social and governmental pressures surrounding environmental standards. As a consequence, improper partner choices in CNOs can be made, potentially undermining the collaborative's overall sustainability goals. The study sheds light on the importance of considering dynamic sustainability factors in partner selection for CNOs, emphasising the need for a more comprehensive and adaptive approach to secure fruitful and lasting collaborations.

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Section: Time Inconsistency In Decisionmakingmentioning

confidence: 99%

Time inconsistency in sustainable partner selection for vertical collaborative network organizations

Badulescu,

Soltan,

Hameri

et al. 2024

IET Collab Intel Manufact

View full text Add to dashboard Cite

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“…However, the time-inconsistency is restricted in the sense that it manifests only at discrete random times that are exponentially distributed. Lastly, Cetemen et al (2023) considers a Markovian continuous-time contracting problem and dynamic inconsistency arising from nonexponential discounting. The authors' examples are limited to the case of a principal having time-inconsistent preferences, and the agent having standard time-consistent preferences.…”

Section: Introductionmentioning

confidence: 99%

“…Lastly, Cetemen et al. (2023) considers a Markovian continuous‐time contracting problem and dynamic inconsistency arising from nonexponential discounting. The authors' examples are limited to the case of a principal having time‐inconsistent preferences, and the agent having standard time‐consistent preferences.…”

Section: Introductionmentioning

confidence: 99%

Time‐inconsistent contract theory

Hernández,

Possamaï

2023

Mathematical Finance

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This paper investigates the moral hazard problem in finite horizon with both continuous and lump‐sum payments, involving a time‐inconsistent sophisticated agent and a standard utility maximizer principal: Building upon the so‐called dynamic programming approach in Cvitanić et al. (2018) and the recently available results in Hernández and Possamaï (2023), we present a methodology that covers the previous contracting problem. Our main contribution consists of a characterization of the moral hazard problem faced by the principal. In particular, it shows that under relatively mild technical conditions on the data of the problem, the supremum of the principal's expected utility over a smaller restricted family of contracts is equal to the supremum over all feasible contracts. Nevertheless, this characterization yields, as far as we know, a novel class of control problems that involve the control of a forward Volterra equation via Volterra‐type controls, and infinite‐dimensional stochastic target constraints. Despite the inherent challenges associated with such a problem, we study the solution under three different specifications of utility functions for both the agent and the principal, and draw qualitative implications from the form of the optimal contract. The general case remains the subject of future research. We illustrate some of our results in the context of a project selection contracting problem between an investor and a time‐inconsistent manager.

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