Behavioral Constraints on the Design of Subgame-Perfect Implementation Mechanisms
American Economic Review
vol. 111,
no. 4, April 2021
(pp. 1055-91)
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.Citation
Fehr, Ernst, Michael Powell, and Tom Wilkening. 2021. "Behavioral Constraints on the Design of Subgame-Perfect Implementation Mechanisms." American Economic Review, 111 (4): 1055-91. DOI: 10.1257/aer.20170297Additional Materials
JEL Classification
- C92 Design of Experiments: Laboratory, Group Behavior
- D44 Auctions
- D82 Asymmetric and Private Information; Mechanism Design
- D86 Economics of Contract: Theory
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making