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The role of bounded rationality and imperfect information in subgame perfect implementation: an empirical investigation


Aghion, Philippe; Fehr, Ernst; Holden, Richard; Wilkening, Tom (2015). The role of bounded rationality and imperfect information in subgame perfect implementation: an empirical investigation. Working paper series / Department of Economics 189, University of Zurich.

Abstract

In this paper we conduct a laboratory experiment to test the extent to which Moore and Repullo's subgame perfect implementation mechanism induces truth-telling in practice, both in a setting with perfect information and in a setting where buyers and sellers face a small amount of uncertainty regarding the good's value. We find that Moore-Repullo mechanisms fail to implement truth-telling in a substantial number of cases even under perfect information about the valuation of the good. This failure to implement truthtelling is due to beliefs about the irrationality of one's trading partner. Therefore, although the mechanism should - in theory - provide incentives for truth-telling, many buyers in fact believe that they can increase their expected monetary payoff by lying. The deviations from truth-telling become significantly more frequent and more persistent when agents face small amounts of uncertainty regarding the good's value. Our results thus suggest that both beliefs about irrational play and small amounts of uncertainty about valuations may constitute important reasons for the absence of Moore-Repullo mechanisms in practice.

Abstract

In this paper we conduct a laboratory experiment to test the extent to which Moore and Repullo's subgame perfect implementation mechanism induces truth-telling in practice, both in a setting with perfect information and in a setting where buyers and sellers face a small amount of uncertainty regarding the good's value. We find that Moore-Repullo mechanisms fail to implement truth-telling in a substantial number of cases even under perfect information about the valuation of the good. This failure to implement truthtelling is due to beliefs about the irrationality of one's trading partner. Therefore, although the mechanism should - in theory - provide incentives for truth-telling, many buyers in fact believe that they can increase their expected monetary payoff by lying. The deviations from truth-telling become significantly more frequent and more persistent when agents face small amounts of uncertainty regarding the good's value. Our results thus suggest that both beliefs about irrational play and small amounts of uncertainty about valuations may constitute important reasons for the absence of Moore-Repullo mechanisms in practice.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:D23, D71, D86, C92
Uncontrolled Keywords:Implementation theory, incomplete contracts, experiments
Language:English
Date:March 2015
Deposited On:02 Apr 2015 07:11
Last Modified:16 Aug 2017 08:11
Series Name:Working paper series / Department of Economics
Number of Pages:47
ISSN:1664-7041
Official URL:http://www.econ.uzh.ch/static/wp/econwp189.pdf
Related URLs:http://www.econ.uzh.ch/static/workingpapers.php

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