On subgame consistent solution for NTU cooperative stochastic dynamic games

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. Yeung and Petrosyan (2015) provided subgame consistent solutions in cooperative dynamic games with non-transferable payoffs/utility (NTU) using a variable payoffs weights scheme is analyzed. This paper extends their analysis to a stochastic dynamic framework. 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.