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The Role of Bounded Rationality and Imperfect Information in Subgame Perfect Implementation - An Empirical Investigation

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  • Philippe Aghion
  • Ernst Fehr
  • Richard Holden
  • Tom Wilkening

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 truth-telling 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.

Suggested Citation

  • Philippe Aghion & Ernst Fehr & Richard Holden & Tom Wilkening, 2015. "The Role of Bounded Rationality and Imperfect Information in Subgame Perfect Implementation - An Empirical Investigation," CESifo Working Paper Series 5300, CESifo.
    • Handle: RePEc:ces:ceswps:_5300
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    2. Yi-Chun Chen & Richard Holden & Takashi Kunimoto & Yifei Sun & Tom Wilkening, 2023. "Getting Dynamic Implementation to Work," Journal of Political Economy, University of Chicago Press, vol. 131(2), pages 285-387.
    3. Fehr, Ernst & Powell, Michael & Wilkening, Tom, 2021. "Behavioral Constraints on the Design of Subgame-Perfect Implementation Mechanisms," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 111(4), pages 1055-1091.
    4. Kyriaki I. Kafka & Pantelis C. Kostis & Panagiotis E. Petrakis, 2022. "Institutional Effects on Innovation and the Requirements for Structural Reforms," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 13(1), pages 211-235, March.
    5. David Frydlinger & Oliver D. Hart, 2019. "Overcoming Contractual Incompleteness: The Role of Guiding Principles," NBER Working Papers 26245, National Bureau of Economic Research, Inc.
    6. Frank Stähler, 2023. "An optimal investor-state dispute settlement mechanism," Journal of Economics, Springer, vol. 138(1), pages 1-16, January.

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    More about this item

    Keywords

    implementation theory; incomplete contracts; experiments;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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