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Behavioral constraints on the design of subgame-perfect implementation mechanisms


Fehr, Ernst; Powell, Michael; Wilkening, Tom (2020). Behavioral constraints on the design of subgame-perfect implementation mechanisms. Working paper series / Department of Economics 171, 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.

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.

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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, Verhaltensökonomie, experimentelle Spieltheorie, experimentelle Wirtschaftsforschung, asymmetrische Information
Language:English
Date:November 2020
Deposited On:13 Aug 2014 14:45
Last Modified:27 Nov 2020 07:21
Series Name:Working paper series / Department of Economics
Number of Pages:87
ISSN:1664-7041
Additional Information:Revised version ; Former title: Handing out guns at a knife fight: behavioral limitations of subgame-perfect implementation
OA Status:Green
Official URL:https://www.econ.uzh.ch/en/research/workingpapers.html?paper-id=850

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