Examining and Explaining Time Inconsistency Problem in Economic Policies

In very, simple words, time inconsistency means failing to conduct programs in consistence with time. In other words, time inconsistency refers to a situation where economic decision-makers preferences transform a long time in a way that what they preferred at a certain time point is not consistent with their preferences at other time points. In everyday life, we always face time inconsistency. It might be said that all economic policies and plans especially in the domain of economy somehow suffer from this problem due to the governments’ failing to adherence to the proclaimed programs as well as owing to the lack of collective and public rationality in using information. Thus it is necessary for any politician or economic planner to be aware of time consistency and its impacts. Citing various examples, this paper would try to explain time consistency from various points of view in the framework of dynamic planning, optimal control theory, and game theory. The purpose, here, is to explain the concept of time consistency and try to prove that all economic policies somehow suffer from time inconsistency. In order to achieve this goal, this paper cites examples, reasons, and previous researches besides making uses of mathematics.