American Economic Review Vol. 111 No. 4 2021

Behavioral Constraints on the Design of Subgame-Perfect Implementation Mechanisms

Ernst Fehr¹; Michael Powell²; Tom Wilkening³

¹ Department of Economics, Zurich University (email: ) · ² Strategy Department, Kellogg School of Management, Northwestern University (email: ) · ³ Wilkening: Department of Economics, The University of Melbourne (email: )

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.

DOI

10.1257/aer.20170297

Volume

111

Issue

4

Pages

1055-1091

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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