Endogenous Group Formation and its impact on Cooperation and Surplus Allocation - An Experimental Analysis

This paper investigates how endogenous group formation combined with the possibility of repeated interaction impacts cooperation within groups and surplus distribution. We developed and tested experimentally a Surplus Allocation Game where cooperation of four agents is needed to produce surplus, but only two have the power to allocate it among the group members. Different matching procedures were used to test the impact of exogenous vs. endogenous group formation. Our results show that repeated interaction with the same partners (endogenous group formation) leads to a self-selection of agents into groups with different life-spans, whose duration is correlated with the behavior of both distributors and receivers. While behavior at the group level is diverse for surplus allocation and amount of cooperation, aggregate behavior is instead similar when groups are exogenously or endogenously formed. Our results cast doubts whether the possibility of repeated interaction can lead to cooperation and efficient outcomes when the ex-post bargaining power about the surplus distribution is very unequal. Rather, it seems to amplify differences in the cooperation and distribution behavior across groups.