Abstract
We study subgame- perfect implementation (SPI) mechanisms that have been proposed as a solution to incomplete contracting problems. We show that these mechanisms, which are based on off- equilibrium arbitration clauses that impose large fines for lying and the inappropriate use of arbitration, have severe behavioral constraints because the fines induce retaliation against legitimate uses of arbitration. Incorporating reciprocity preferences into the theory explains the observed behavioral patterns and helps us develop a new mechanism that is more robust and achieves high rates of truth- telling and efficiency. Our results highlight the importance of tailoring implementation mechanisms to the underlying behavioral environment.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 1055-1091 |
| Number of pages | 37 |
| Journal | American Economic Review |
| Volume | 11 |
| Issue number | 4 |
| DOIs | |
| State | Published - Apr 2021 |
Funding
*Fehr: Department of Economics, Zurich University (email: [email protected]); Powell: Strategy Department, Kellogg School of Management, Northwestern University (email: [email protected]. edu): Wilkening: Department of Economics, The University of Melbourne (email: [email protected]. au). Roland Bénabou was the coeditor for this article. We thank James Bland, Sanket Patil, and Hans Zhu for excellent research assistance. We also thank Mathias Dewatripont, Martin Dufwenberg, Greg Fischer, Robert Gibbons, Lorenz Goette, Oliver Hart, Eric Maskin, Jean Tirole, and Christian Zehnder for helpful comments. We gratefully acknowledge the financial support of the Australian Research Council through the Discovery Early Career Research Award DE140101014 as well as the Faculty of Business and Economics at the University of Melbourne. Ernst Fehr acknowledges support by the Swiss National Science Foundation, project on “Distribution and Determinants of Social Preferences,” (project 100018_140734\1) and the European Research Council, Adavanced Grant on “Foundations of Economic Preferences.” †Go to https://doi.org/10.1257/aer.20170297 to visit the article page for additional materials and author disclosure statements.
ASJC Scopus subject areas
- Economics and Econometrics