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Institution formation in public goods games

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  • Kosfeld, M.
  • Okada, A.
  • Riedl, A.M.

    (Microeconomics & Public Economics)

Abstract

Sanctioning institutions are of utmost importance for overcoming free-riding tendencies and enforcing outcomes that maximize group welfare in social dilemma situations. We investigate, theoretically and experimentally, the endogenous formation of institutions in public goods provision. Our theoretical analysis shows that players may form sanctioning institutions in equilibrium, including those governing only a subset of players. The experiment confirms that institutions are formed and that it positively affects cooperation and group welfare. However, the data also shows that success is not guaranteed. Players are unwilling to implement equilibrium institutions in which some players have the opportunity to free ride. Our results emphasize the role of fairness in the institution formation process. (JEL C72, D02, H41)
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  • Kosfeld, M. & Okada, A. & Riedl, A.M., 2006. "Institution formation in public goods games," Research Memorandum 029, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    • Handle: RePEc:unm:umamet:2006029
    DOI: 10.26481/umamet.2006029
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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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