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Institution Formation in Public Goods Games

  • Michael Kosfeld
  • Akira Okada
  • Arno Riedl

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 - University of Zurich in its series IEW - Working Papers with number 299.

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Date of creation: Aug 2006
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Handle: RePEc:zur:iewwpx:299
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  1. Carpenter, Jeffrey P., 2004. "Punishing Free-Riders: How Group Size Affects Mutual Monitoring and the Provision of Public Goods," IZA Discussion Papers 1337, Institute for the Study of Labor (IZA).
  2. Jean-Robert Tyran & Lars P. Feld, 2006. "Achieving Compliance when Legal Sanctions are Non-deterrent," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(1), pages 135-156, 03.
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  9. 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.
  10. Carpenter, Jeffrey P., 2007. "The demand for punishment," Journal of Economic Behavior & Organization, Elsevier, vol. 62(4), pages 522-542, April.
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  12. Fischbacher, Urs & Gachter, Simon & Fehr, Ernst, 2001. "Are people conditionally cooperative? Evidence from a public goods experiment," Economics Letters, Elsevier, vol. 71(3), pages 397-404, June.
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  17. 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.
  18. Walker, James M, et al, 2000. "Collective Choice in the Commons: Experimental Results on Proposed Allocation Rules and Votes," Economic Journal, Royal Economic Society, vol. 110(460), pages 212-34, January.
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  24. 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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