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Subgame-Perfect Implementation Under Information Perturbations

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  • Philippe Aghion
  • Drew Fudenberg
  • Richard Holden
  • Takashi Kunimoto
  • Olivier Tercieux

Abstract

We consider the robustness of extensive form mechanisms to deviations from common knowledge about the state of nature, which we refer to as information perturbations. First, we show that even under arbitrarily small information perturbations the Moore-Repullo mechanism does not yield (even approximately) truthful revelation and that in addition the mechanism has sequential equilibria with undesirable outcomes. More generally, we prove that any extensive form mechanism is fragile in the sense that if a non-Maskin monotonic social objective can be implemented with this mechanism, then there are arbitrarily small information perturbations under which an undesirable sequential equilibrium also exists. Finally, we argue that outside options can help improve efficiency in asymmetric information environments, and that these options can be thought of as reflecting ownership of an asset. JEL Codes: C72, D23, D78, D82 Copyright 2012, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal The Quarterly Journal of Economics.

Volume (Year): 127 (2012)
Issue (Month): 4 ()
Pages: 1843-1881

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Handle: RePEc:oup:qjecon:v:127:y:2012:i:4:p:1843-1881

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Citations

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Cited by:
  1. Kartik, Navin & Tercieux, Olivier & Holden, Richard, 2014. "Simple mechanisms and preferences for honesty," Games and Economic Behavior, Elsevier, vol. 83(C), pages 284-290.
  2. Goldlücke, Susanne & Schmitz, Patrick W., 2014. "Investments as signals of outside options," Journal of Economic Theory, Elsevier, vol. 150(C), pages 683-708.
  3. Berde, Éva, 2013. "A fundamentális transzformáció és a referenciapont szerepe a hiányos szerződések elméletében
    [The role of basic transformation and reference point in the theory of incomplete contracts]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 865-885.
  4. Thomas F. Hellmann & Veikko Thiele, 2012. "A Theory of the Firm based on Partner Displacement," NBER Working Papers 18495, National Bureau of Economic Research, Inc.
  5. Oliver D. Hart, 2011. "Noncontractible Investments and Reference Points," NBER Working Papers 16929, National Bureau of Economic Research, Inc.
  6. Matthias Lang, 2014. "Communicating Subjective Evaluations," CESifo Working Paper Series 4830, CESifo Group Munich.
  7. Bester, Helmut & Krähmer, Daniel, 2008. "Exit options in incomplete contracts with asymmetric information," Discussion Papers 2008/23, Free University Berlin, School of Business & Economics.
  8. Philippe Aghion & Richard Holden, 2011. "Incomplete Contracts and the Theory of the Firm: What Have We Learned over the Past 25 Years?," Journal of Economic Perspectives, American Economic Association, vol. 25(2), pages 181-97, Spring.
  9. Kyungmin Kim & Antonio Penta, 2012. "A Robustly Efficient Auction," Carlo Alberto Notebooks 248, Collegio Carlo Alberto.
  10. Ohlendorf, Susanne & Schmitz, Patrick, 2009. "Signaling an Outside Option," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 281, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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