This paper analyzes how institutions aimed at coordinating economic interactions may appear. We build a model in which agents play a prisoners’ dilemma game in a hypothetical state of nature. Agents can delegate the task of enforcing cooperation in interactions to one of them in exchange for a proper compensation. Two basic commitment problems stand in the way of institution formation. The first one is the individual commitment problem that arises because an agent chosen to run the institution may prefer to renege ex post. The second one is a “collective commitment” problem linked to the lack of binding agreements on the fee that will be charged by the centre once it is designated. This implies first that a potentially socially efficient institution may fail to arise because of the lack of individual incentives, and second that even if it arises, excessive rent extraction by the institution may imply a sub-optimal efficiency level, explaining the heterogeneity of observed institutional arrangements. An institution is less likely to arise in small groups with limited endowments, but also when the underlying commitment problem is not too severe. Finally, we show that the threat of secession by a subset of agents may endogenously solve part of the second commitment problem.
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Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number
148.
Find related papers by JEL classification: C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games D02 - Microeconomics - - General - - - Institutions: Design, Formation, and Operations O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements Z13 - Other Special Topics - - Cultural Economics - - - Social Norms and Social Capital; Social Networks Economic Anthropology
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