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Journal Article
Behavioral Constraints on the Design of Subgame-Perfect Implementation Mechanisms
American Economic Review
Author(s)
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.
Date Published:
2021
Citations:
Fehr, Ernst, Michael Powell, Tom Wilkening. 2021. Behavioral Constraints on the Design of Subgame-Perfect Implementation Mechanisms. American Economic Review. (4)1055-1091.