Subgame consistent cooperative solution for NTU dynamic games via variable weights

Abstract

In cooperative dynamic games a stringent condition–subgame consistency–is required for a dynamically stable solution. In particular, a cooperative solution is subgame consistent if the optimality principle agreed upon at the outset remains in effect in any subgame starting at a later stage with a state brought about by prior optimal behavior. Hence the players do not have incentives to deviate from the previously adopted optimal behavior. For the first time, subgame consistent solutions in cooperative dynamic games with non-transferable payoffs/utility (NTU) using a variable payoff weights scheme is analyzed. A solution mechanism for characterizing subgame consistent solutions is derived. The use of a variable payoff weights scheme allows the derivation of subgame consistent solutions under a wide range of optimality principles. The analysis widens the application of NTU cooperative dynamic games through the provision of a dynamically stable solution.