Seminar

Subgame Perfect Implementation under Approximate Common Knowledge: Evidence from a Laboratory Experiment

Philippe Aghion (Harvard University)

April 3, 2012, 11:00–12:30

Toulouse

Room Amphi S

Economic Theory Seminar

Abstract

A remarkable result, due to Moore & Repullo (1988) is that any social choice function can be implemented as the unique equilibrium of a suitably constructed dynamic game (subgame perfect implementation). Yet such mechanisms are never observed in practice, which raises the question: why not? In this paper we test such mechanisms experimentally and find that even small deviations from perfect information cause large and persistent deviations from efficiency and truth-telling. This fragility provides an explanation for why these mechanisms are not observed in practice, which in turn has implications for the debate on the foundations of incomplete contracting. Keywords: Implementation Theory, Incomplete Contracts, Experiments