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Subgame-Perfect Implementation Under Information Perturbations

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

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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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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