Thats what you get when you have Tarot card reading on your CV 😉

PS. I thought dynamic inconsistency was brought on by drinking too much beer.

PPS. My mistake, I was thinking of dynamic incontinency.

1) Papers usually tend to take the person’s current preferred choice as the optimal one. They calculate the choices that the agent would make if they had full precommitment power and take that as the welfare maximising trajectory. Obviously future selves would disagree but that’s the cause of the welfare loss so their disagreement is essentially disregarded. From the point of view of the current period the precommitment outcome can be regarded as first best.

2) There are two ways of modelling inconsistent agents: as self-aware agents who recognise that they’re inconsistent or as naive agents who don’t. Naive agents will exhibit inconsistency in their decisions, while self-aware agents will take into account the consequences of future incentives to deviate when they choose their current action. As you say, the sophisticated agents will be sub-game perfect in their decision making. However, compensating for future incentives to deviate acts as a constraint upon their utility maximisation and means they can only achieve a second best outcome. Depending upon the payoffs it can sometimes be the case that the naive agent is better off than the sophisticated one! In either case, availing the agents of precommitment power can improve their overall welfare.

3) Inconsistency usually arises as a result of either inter-temporal, intra-personal externalities or as a result of a non-exponential discount rate. In the first case, a sophisticated agent will compensate for the externalities in order to be time consistent but, thus constrained, will not be able to achieve first best outcomes. This type of inconsistency is usually caused by the current payoff depending upon an expected future action. In the latter case the cause of inconsistency is obvious, as you say.

Does that make any sense or did I fail to really explain it all over again?