Equilibrium strategies for constrained time-inconsistent control problems

Abstract

Abstract This paper addresses the issue of time inconsistency in recursive stochastic control problems, in which the forward state process evolves under the influence of an additional recursive utility system. Through an adaptation of Ekeland’s variational principle, we establish necessary conditions for subgame-perfect (Nash) equilibrium strategies, formulated in terms of a Hamiltonian framework defined via coupled backward stochastic differential equations. To illustrate the scope of the results, we consider a constrained portfolio management problem with a finite deterministic horizon and non-exponential discounting, demonstrating the applicability of the proposed methodology in a financial context. The class of admissible constraints examined includes, in particular, the imposition of risk limits on the terminal wealth .