Subgame Perfect Implementation with Almost Perfect Information and the Hold-Up Problem

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. Aghion: Harvard University, Department of Economics. email: [email protected]. Fudenberg: Harvard University, Department of Economics. email: [email protected]. Holden: University of Chicago, Booth School of Business. email: [email protected]. We owe special thanks to Oliver Hart for numerous discussions, and to Johannes Horner and Andy Skrzypacz for pointing out an error in a previous version. We are also grateful to Mathias Dewatripont, Bob Gibbons, Philippe Jehiel, John Moore, Roger Myerson, Andrew Postlewaite, Olivier Tercieux, Jean Tirole, Ivan Werning and Muhamet Yildiz for helpful discussions and comments. Michael Powell provided excellent research assistance.