Local Time Pushed Mixed Equilibrium Strategies for Time-Inconsistent Stopping Problems
Andi Bodnariu, Sören Christensen, Kristoffer Lindensjö · SIAM Journal on Control and Optimization · 2024
Abstract. We consider the game-theoretic approach to time-inconsistent stopping of a one-dimensional diffusion where the time-inconsistency is due to the presence of a nonexponential (weighted) discount function. In particular, we study (weak) equilibria for this problem in a novel class of mixed (i.e., randomized) stopping times based on a local time construction of the stopping intensity. For a general formulation of the problem we provide a verification theorem giving sufficient conditions for mixed (and pure) equilibria in terms of a set of variational inequalities, including a smooth fit condition. We apply the theory to prove the existence of (mixed) equilibria in a recently studied real options problem in which no pure equilibria exist.