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

University of Zurich, Department of Economics, Working Paper No. 189

48 Pages Posted: 2 Apr 2015

See all articles by Philippe Aghion

Philippe Aghion

College de France and London School of Economics and Political Science, Fellow; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Ernst Fehr

University of Zurich - Department of Economics

Richard Holden

University of New South Wales (UNSW)

Tom Wilkening

University of Melbourne

Multiple version iconThere are 3 versions of this paper

Date Written: March 2015

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.

Keywords: Implementation theory, incomplete contracts, experiments

JEL Classification: D23, D71, D86, C92

Suggested Citation

Aghion, Philippe and Fehr, Ernst and Holden, Richard and Wilkening, Tom S., The Role of Bounded Rationality and Imperfect Information in Subgame Perfect Implementation: An Empirical Investigation (March 2015). University of Zurich, Department of Economics, Working Paper No. 189. Available at SSRN: https://ssrn.com/abstract=2588937 or http://dx.doi.org/10.2139/ssrn.2588937

Philippe Aghion (Contact Author)

College de France and London School of Economics and Political Science, Fellow ( email )

London
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ernst Fehr

University of Zurich - Department of Economics ( email )

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Zuerich, 8006
Switzerland
+41 1 634 3709 (Phone)
+41 1 634 4907 (Fax)

Richard Holden

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Tom S. Wilkening

University of Melbourne ( email )

FBE Building, Level 4
111 Barry Street, Carlton, Victoria 3053
Melbourne, Carlton 3054
Australia
+61 3 8344 7027 (Phone)

HOME PAGE: http://www.tomwilkening.com

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