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Institution Formation in Public Goods Games

  • Michael Kosfeld
  • Akira Okada
  • Arno Riedl

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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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 99 (2009)
Issue (Month): 4 (September)
Pages: 1335-55

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Handle: RePEc:aea:aecrev:v:99:y:2009:i:4:p:1335-55
Note: DOI: 10.1257/aer.99.4.1335
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  18. Yaw Nyarko & Andrew Schotter, 2002. "An Experimental Study of Belief Learning Using Elicited Beliefs," Econometrica, Econometric Society, vol. 70(3), pages 971-1005, May.
  19. Jeffrey Carpenter, 2002. "The Demand for Punishment," Middlebury College Working Paper Series 0243, Middlebury College, Department of Economics.
  20. Josef Falkinger, 2004. "Noncooperative Support of Public Norm Enforcement in Large Societies," CESifo Working Paper Series 1368, CESifo Group Munich.
  21. Haigner, Stefan & Kocher, Martin & Sutter, Matthias, 2006. "Choosing the Stick or the Carrot? Endogenous Institutional Choice in Social Dilemma Situations," CEPR Discussion Papers 5497, C.E.P.R. Discussion Papers.
  22. David Masclet & Charles Noussair & Steven Tucker & Marie Claire Villeval, 2002. "Monetary and non Monetary Punishment in the Voluntary Contribution Mechanism," Post-Print halshs-00176878, HAL.
  23. Martijn Egas & Arno Riedl, 2005. "The Economics of Altruistic Punishment and the Demise of Cooperation," Tinbergen Institute Discussion Papers 05-065/1, Tinbergen Institute.
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