The Maximum Principle for Global Solutions of Stochastic Stackelberg Differential Games

Abstract

For stochastic Stackelberg differential games played by a leader and a follower, there are several solution concepts in terms of the players' information sets. In this paper we derive the maximum principle for the leader's global Stackelberg solution under the adapted closed-loop memoryless information structure, where the term global signifies the leader's domination over the entire game duration. As special cases, we study linear quadratic Stackelberg games under both adapted open-loop and adapted closed-loop memoryless information structures, as well as the resulting Riccati equations.

Keywords: Stackelberg differential game, maximum principle, forward-backward stochastic differential equation, Riccati equation

JEL Classification: E20