A Stackelberg solution of dynamic games

The paper proposes a formulation of ε-Stackelberg and Stackelberg strategies for a large class of dynamic closed-loop games, discusses the interpretation of the leader's strategy as the formalization of the intuitive notion of incentives or threats, and considers limitations of the Stackelberg solution concept which, within the dynamic context, are applicable only in situations where the realization of a leader's strategy is ensured by a binding contract. The solution method is based on the idea of discontinuous strategies assuming that the leader punishes the follower by minimizing his payoff if the latter does not comply with the policy selected for him by the leader.