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

Author

Listed:
  • Philippe Aghion

    (Harvard University, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, Collège de France - Chaire Economie des institutions, de l'innovation et de la croissance - CdF (institution) - Collège de France)

  • Ernst Fehr

    (UZH - Universität Zürich [Zürich] = University of Zurich)

  • Richard Holden

    (UNSW - University of New South Wales [Canberra Campus])

  • Tom Wilkening

    (University of Melbourne)

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, 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. Our data further suggests that a substantial proportion of these lies are made by subjects who hold pessimistic beliefs about the rationality of their trading partners. 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, 2018. "The Role of Bounded Rationality and Imperfect Information in Subgame Perfect Implementation—An Empirical Investigation," Post-Print halshs-01756795, HAL.
    • Handle: RePEc:hal:journl:halshs-01756795
    DOI: 10.1093/jeea/jvx026
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    Cited by:

    1. Hanaki, Nobuyuki & Hayashi, Takashi & Lombardi, Michele & Ogawa, Kazuhito, 2021. "Partial equilibrium mechanism and inter-sectoral coordination: An experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 190(C), pages 366-389.
    2. Alessandra Casella & Evan Friedman & Manuel Perez Archila, 2020. "Mediating Conflict in the Lab," NBER Working Papers 28137, National Bureau of Economic Research, Inc.
    3. David Frydlinger & Oliver D. Hart, 2019. "Overcoming Contractual Incompleteness: The Role of Guiding Principles," NBER Working Papers 26245, National Bureau of Economic Research, Inc.
    4. 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.
    5. 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.
    6. 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.
    7. Frank Stähler, 2023. "An optimal investor-state dispute settlement mechanism," Journal of Economics, Springer, vol. 138(1), pages 1-16, January.

    More about this item

    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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