Behavioral Constraints on the Design of Subgame-Perfect Implementation Mechanisms

We study subgame-perfect implementation (SPI) mechanisms that have been proposed in the literature as a solution to the hold-up problem. We show that SPI mechanism – which are based on off-equilibrium arbitration clauses that impose fines for lying and the inappropriate use of arbitration — have severe behavioral constraints. The fines imposed in the SPI mechanism induce retaliation against legitimate uses of arbitration. This, in term makes parties reluctant to trigger arbitration and leads to costly disagreements. Incentive-compatible redesigns of the mechanism mitigate some of these problems but generate new ones such that the overall performance of the redesigned mechanisms remains low.