Abstract: In many instances, agents (e.g., firms, countries) opt for long-term contracts instead of short-term ones for essentially two main reasons. First, a long-term agreement avoids the possibly high renegotiation cost (in dollars and time). Second, if today’s decisions influence tomorrow’s payoff, then short-term optimization and cost-benefit analysis lead to bad decisions. One main concern with long-term agreements is their sustainability, that is, how to ensure that the concerned parties will honor their commitments as time goes by. In this work, we study the issue of the time consistency of cooperative agreements in dynamic games with non-transferable utility. An agreement designed at the outset of a game is time-consistent (or sustainable) if it remains in place for the entire duration of the game, that is, if the players would not benefit from switching to their non-cooperative strategies. The literature has highlighted that, since side payments are not allowed, the design of such an agreement is very challenging. To address this issue, we introduce different notions for the temporal stability of an agreement and characterize the agreement’s intrinsic longevity. We illustrate our general results with a linear-quadratic difference game and show that an agreement’s longevity can be easily assessed using the problem data. We also study the effect of information structure on the longevity of the agreement. We illustrate our results with a numerical example.

Speaker Bio: Dr. Puduru Viswanadha Reddy is currently working as an assistant professor at the Department of Electrical Engineering, IIT Madras. He obtained his Ph.D in Operations Research from Tilburg University, The Netherlands. Prior to this, he received M.S. from the University of Maryland, M.Sc (Engg) from the Indian Institute of Science and B.Tech from Sri Venkateswara University, Tirupati. His current research interests include analysis of dynamical systems (control theory) and decision sciences (game theory and optimization).