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Institution Formation in Public Goods Games

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Author Info
Michael Kosfeld
Akira Okada
Arno Riedl

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Abstract

Centralized sanctioning institutions are of utmost importance for overcoming free-riding tendencies and enforcing outcomes that maximize group welfare in social dilemma situations. However, little is known about how such institutions come into existence. In this paper we investigate, both theoretically and experimentally, the endogenous formation of institutions in a public goods game. Our theoretical analysis shows that players may form sanctioning institutions in equilibrium, including those where institutions govern only a subset of players. The experiment confirms that institutions are formed frequently as well as that institution formation has a positive impact on cooperation rates and group welfare. However, the data clearly reveal that players are unwilling to implement institutions in which some players have the opportunity to free ride. In sum, our results show that individuals are willing and able to create sanctioning institutions, but that the institution formation process is guided by behavioral principles not taken into account by standard theory.

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Paper provided by Institute for Empirical Research in Economics - IEW in its series IEW - Working Papers with number iewwp299.

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Date of creation: Aug 2006
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Handle: RePEc:zur:iewwpx:299

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Related research
Keywords: public goods; institutions; sanctions; cooperation;

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Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior

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  2. Matthias Sutter & Hannelore Weck-Hannemann, 2004. "An Experimental Test of the Public Goods Crowing Out Hypothesis when Taxation Is Endogenous," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(1), pages 94-, April.
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  5. Josef Falkinger et al., 2000. "A Simple Mechanism for the Efficient Provision of Public Goods: Experimental Evidence," American Economic Review, American Economic Association, vol. 90(1), pages 247-264, March. [Downloadable!] (restricted)
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  6. Okada, Akira, 1993. " The Possibility of Cooperation in an n-Person Prisoners' Dilemma with Institutional Arrangements," Public Choice, Springer, vol. 77(3), pages 629-56, November.
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  10. Martijn Egas & Arno Riedl, 2005. "The Economics of Altruistic Punishment and the Demise of Cooperation," Tinbergen Institute Discussion Papers 05-065/1, Tinbergen Institute. [Downloadable!]
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  12. Sonnemans, Joep & Schram, Arthur & Offerman, Theo, 1998. "Public good provision and public bad prevention: The effect of framing," Journal of Economic Behavior & Organization, Elsevier, vol. 34(1), pages 143-161, January. [Downloadable!] (restricted)
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  15. Jeffrey Carpenter, 2002. "The Demand for Punishment," Middlebury College Working Paper Series 0243, Middlebury College, Department of Economics. [Downloadable!]
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  16. Nikos Nikiforakis & Hans-Theo Normann, 2005. "A Comparative Statics Analysis of Punishment in Public-Good Experiments," Royal Holloway, University of London: Discussion Papers in Economics 05/07, Department of Economics, Royal Holloway University of London, revised Jun 2005. [Downloadable!]
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  17. Ernst Fehr & Simon Gaechter, 2003. "Altruistic Punishment in Humans," Microeconomics 0305006, EconWPA. [Downloadable!]
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  19. Anderson, Christopher M. & Putterman, Louis, 2006. "Do non-strategic sanctions obey the law of demand? The demand for punishment in the voluntary contribution mechanism," Games and Economic Behavior, Elsevier, vol. 54(1), pages 1-24, January. [Downloadable!] (restricted)
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  20. Urs Fischbacher & Simon Gaechter & Ernst Fehr, . "Are People Conditionally Cooperative? Evidence from a Public Goods Experiment," IEW - Working Papers iewwp016, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  21. Martin Sefton & Robert Shupp & James M. Walker, 2006. "The Effect of Rewards and Sanctions in Provision of Public Goods," Caepr Working Papers 2006-005, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington, revised Aug 2006. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ernst Fehr & Klaus M. Schmidt, 2009. "On Inequity Aversion A Reply to Binmore and Shaked," Discussion Papers 276, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
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  2. Anke Gerber & Philipp C. Wichardt, 2007. "Providing Public Goods Without Strong Sanctioning Institutions," Discussion Papers 194, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
  3. Jeffrey Carpenter & Peter Matthews, 2009. "What norms trigger punishment?," Experimental Economics, Springer, vol. 12(3), pages 272-288, September. [Downloadable!] (restricted)
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  4. Anke Gerber & Philipp C. Wichardt, 2008. "Providing Public Goods in the Absence of Strong Institutions," IEW - Working Papers iewwp303, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  5. Rockenbach, Bettina & Wolff, Irenaeus, 2009. "Institution design in social dilemmas: How to design if you must?," MPRA Paper 16922, University Library of Munich, Germany. [Downloadable!]
  6. Antoine Billot & Chantal Marlats, 2009. "Préferences psychologiques et nouvelle économie politique," PSE Working Papers 2009-04, PSE (Ecole normale supérieure). [Downloadable!]
  7. Noussair, C.N. & Tan, F., 2009. "Voting on Punishment Systems Within a Heterogeneous Group," Discussion Paper 2009-19, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  8. Francesca Bortolami & Luigi Mittone, 2009. "Does Participating in a Collective Decision Affect the Levels of Contributions Provided? An Experimental Investigation," CEEL Working Papers 0902, Computable and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia. [Downloadable!]
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