Dynamic inconsistency

Dynamic inconsistency, or time inconsistency is a term used in game theory economics to describe a situation in a dynamic game, where a player's best plan for some future period will not be optimal when that future period arrives; The plan is dynamically inconsistent. A dynamically inconsistent game is subgame imperfect.

Stylized examples

Each day smokers face a dynamic inconsistency, their best plan is to enjoy smoking today, but to quit tomorrow in order to get health benefits. However, the next day, the plan is the same; enjoy smoking today and quit tomorrow. This goes on, and they never give up, even though they plan to, hence the inconsistency.

Government policy makers also suffer from dynamic inconsistency, as they are best off promising that there will be lower inflation tomorrow. But once tomorrow comes lowering inflation may have negative effects, such as increasing unemployment, so they do not make much effort to lower it. This is why independent central banks can be advantageous for a country, as they worry about they make decisions for the greater good, not to keep government policy makers popular.