Behavioral constraints on the design of subgame-perfect implementation mechanisms

Ernst Fehr, Michael Powell and Tom Wilkening

No 171, ECON - Working Papers from Department of Economics - University of Zurich

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 underlying behavioral environment.

Keywords: Implementation theory; incomplete contracts; experiments (search for similar items in EconPapers)
JEL-codes: C92 D23 D71 D86 (search for similar items in EconPapers)
Date: 2014-08, Revised 2020-11
New Economics Papers: this item is included in nep-cbe, nep-cdm, nep-cta, nep-exp and nep-gth
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Behavioral Constraints on the Design of Subgame-Perfect Implementation Mechanisms (2021)
Journal Article: Behavioral Constraints on the Design of Subgame-Perfect Implementation Mechanisms (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:zur:econwp:171

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