Working Paper: NBER ID: w15167
Authors: Philippe Aghion; Drew Fudenberg; Richard T. Holden
Abstract: The foundations of incomplete contracts have been questioned using or extending the subgame perfect implementation approach of Moore and Repullo (1988). We consider the robustness of subgame perfect implementation to the introduction of small amounts of asymmetric information. We show that Moore- Repullo mechanisms may not yield (even approximately) truthful revelation in pure or totally mixed strategies as the amount of asymmetric information goes to zero. Moreover, we argue that a wide class of extensive-form mechanisms are subject to this fragility.
Keywords: subgame perfect implementation; asymmetric information; holdup problem
JEL Codes: C72; C73; D23; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| MR mechanism (C30) | truthful revelation (Y20) |
| asymmetric information (D82) | MR mechanism performance (C59) |
| private signals (Y50) | MR mechanism implementation logic (C59) |
| private information (D82) | holdup problem (D86) |
| asymmetric information (D82) | holdup problem (D86) |