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Contribution Details

Type Working Paper
Scope Discipline-based scholarship
Title Behavioral constraints on the design of subgame-perfect implementation mechanisms
Organization Unit
  • Ernst Fehr
  • Michael Powell
  • Tom Wilkening
  • English
Institution University of Zurich
Series Name Working paper series / Department of Economics
Number 171
ISSN 1664-7041
Number of Pages 87
Date 2020
Abstract Text 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 underlying behavioral environment.
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Keywords Implementation theory, incomplete contracts, experiments, Verhaltensökonomie, experimentelle Spieltheorie, experimentelle Wirtschaftsforschung, asymmetrische Information
Additional Information Revised version ; Former title: Handing out guns at a knife fight: behavioral limitations of subgame-perfect implementation