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Subgame-Perfect Implementation Under Information Perturbations

Author

Listed:
  • Philippe Aghion

    (Harvard University [Cambridge])

  • Drew Fudenberg

    (Harvard University [Cambridge])

  • Richard Holden

    (Harvard University [Cambridge], University of New South Wales [Sydney])

  • Takashi Kunimoto

    (Harvard University [Cambridge])

  • Olivier Tercieux

    (PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)

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.

Suggested Citation

  • Philippe Aghion & Drew Fudenberg & Richard Holden & Takashi Kunimoto & Olivier Tercieux, 2012. "Subgame-Perfect Implementation Under Information Perturbations," PSE - Labex "OSE-Ouvrir la Science Economique" hal-00812781, HAL.
  • Handle: RePEc:hal:pseose:hal-00812781 DOI: 10.1093/qje/qjs026 Note: View the original document on HAL open archive server: https://hal-pjse.archives-ouvertes.fr/hal-00812781
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Matthias Lang, 2012. "Communicating Subjective Evaluations," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2012_14, Max Planck Institute for Research on Collective Goods, revised Apr 2017.
    3. Committee, Nobel Prize, 2016. "Oliver Hart and Bengt Holmström: Contract Theory," Nobel Prize in Economics documents 2016-1, Nobel Prize Committee.
    4. Eccles, Peter & Wegner, Nora, 2016. "Robustness of subgame perfect implementation," Bank of England working papers 601, Bank of England.
    5. Bester, Helmut & Krähmer, Daniel, 2012. "Exit options in incomplete contracts with asymmetric information," Journal of Economic Theory, Elsevier, vol. 147(5), pages 1947-1968.
    6. Oliver Hart, 2013. "Noncontractible Investments and Reference Points," Games, MDPI, Open Access Journal, vol. 4(3), pages 1-20, August.
    7. Kartik, Navin & Tercieux, Olivier & Holden, Richard, 2014. "Simple mechanisms and preferences for honesty," Games and Economic Behavior, Elsevier, pages 284-290.
    8. Ortner, Juan, 2015. "Direct implementation with minimally honest individuals," Games and Economic Behavior, Elsevier, vol. 90(C), pages 1-16.
    9. n/a, 2012. "Commentaries and Reply to "Can Brand Extension Signal Product Quality?" by Sridhar Moorthy," Marketing Science, INFORMS, vol. 31(5), pages 771-778, September.
    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.
    11. Fehr, Ernst & Powell, Michael & Wilkening, Tom, 2014. "Handing Out Guns at a Knife Fight: Behavioral Limitations of Subgame-Perfect Implementation," IZA Discussion Papers 8404, Institute for the Study of Labor (IZA).
    12. Eduard Marinov, 2016. "The 2016 Nobel Prize in Economics," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 97-149.
    13. Guembel, Alexander & White, Lucy, 2014. "Good cop, bad cop: Complementarities between debt and equity in disciplining management," Journal of Financial Intermediation, Elsevier, vol. 23(4), pages 541-569.
    14. Goldlücke, Susanne & Schmitz, Patrick W., 2014. "Investments as signals of outside options," Journal of Economic Theory, Elsevier, vol. 150(C), pages 683-708.
    15. Hart, Oliver D., 2013. "Noncontractible Investments and Reference Points," Scholarly Articles 29058539, Harvard University Department of Economics.
    16. 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.
    17. Hoppe, Eva I & Schmitz, Patrick W, 2015. "Hidden Action and Outcome Contractibility: An Experimental Test of Contract Theory," CEPR Discussion Papers 11002, C.E.P.R. Discussion Papers.
    18. Schmidt, Klaus, 2017. "The 2016 Nobel Memorial Prize in Contract Theory," Rationality and Competition Discussion Paper Series 19, CRC TRR 190 Rationality and Competition.
    19. 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 181-197, Spring.
    20. Chen, Yi-Chun & Sun, Yifei, 2015. "Full implementation in backward induction," Journal of Mathematical Economics, Elsevier, vol. 59(C), pages 71-76.
    21. Geoffroy de Clippel & Rene Saran & Roberto Serrano, 2014. "Mechanism Design with Bounded Depth of Reasoning and Small Modeling Mistakes," Working Papers 2014-7, Brown University, Department of Economics.
    22. Carroll, Gabriel & Meng, Delong, 2016. "Locally robust contracts for moral hazard," Journal of Mathematical Economics, Elsevier, vol. 62(C), pages 36-51.
    23. Mezzetti, Claudio & Renou, Ludovic, 2017. "Repeated Nash implementation," Theoretical Economics, Econometric Society, vol. 12(1), January.
    24. Kyungmin Kim & Antonio Penta, 2012. "A Robustly Efficient Auction," Carlo Alberto Notebooks 248, Collegio Carlo Alberto.

    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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