Journal article

Behavioral Constraints on the Design of Subgame-Perfect Implementation Mechanisms

Ernst Fehr, Michael Powell, Tom Wilkening

American Economic Review | AMER ECONOMIC ASSOC | Published : 2021

Abstract

We study subgame-perfect implementation (SPI) mechanisms that have been proposed as a solution to incomplete contracting problems. We show that these mechanisms, which are based on off-equilibrium arbitration clauses that impose large fines for lying and the inappropriate use of arbitration, have severe behavioral constraints because the fines induce retaliation against legitimate uses of arbitration. Incorporating reciprocity preferences into the theory explains the observed behavioral patterns and helps us develop a new mechanism that is more robust and achieves high rates of truth-telling and efficiency. Our results highlight the importance of tailoring implementation mechanisms to the un..

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University of Melbourne Researchers

Grants

Awarded by Australian Research Council


Awarded by Swiss National Science Foundation


Funding Acknowledgements

Fehr: Department of Economics, Zurich University (email:ernst.fehr@econ.uzh.ch); Powell: Strategy Department, Kellogg School of Management, Northwestern University (email: mike-powell@kellogg.northwestern.edu): Wilkening: Department of Economics, The University of Melbourne (email:Tom.Wilkening@unimelb.edu.au).Roland Benabou was the coeditor for this article. We thank James Bland, Sanket Patil, and Hans Zhu for excellent research assistance. We also thank Mathias Dewatripont, Martin Dufwenberg, Greg Fischer, Robert Gibbons, Lorenz Goette, Oliver Hart, Eric Maskin, Jean Tirole, and Christian Zehnder for helpful comments. We gratefully acknowledge the financial support of the Australian Research Council through the Discovery Early Career Research Award DE140101014 as well as the Faculty of Business and Economics at the University of Melbourne. Ernst Fehr acknowledges support by the Swiss National Science Foundation, project on "Distribution and Determinants of Social Preferences," (project 100018_140734\1) and the European Research Council, Adavanced Grant on "Foundations of Economic Preferences."