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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. 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.
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  3. 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.
  4. David Masclet & Charles Noussair & Steven Tucker & Marie-Claire Villeval, 2003. "Monetary and non Monetary Punishment in the Voluntary Contributions Mechanism," Post-Print halshs-00175251, HAL.
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  6. Martin Sefton & Robert S. Shupp & James Walker, 2005. "The Effect of Rewards and Sanctions in Provision of Public Goods," Working Papers 200504, Ball State University, Department of Economics, revised Feb 2005.
  7. 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.
  8. 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.
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  10. Fehr, Ernst & Schmidt, Klaus M., 1999. "A theory of fairness, competition, and cooperation," Munich Reprints in Economics 20650, University of Munich, Department of Economics.
  11. Josef Falkinger & Ernst Fehr & Simon Gaechter, . "A Simple Mechanism for the Efficient Provision of Public Goods - Experimental Evidence," IEW - Working Papers 003, Institute for Empirical Research in Economics - University of Zurich.
  12. Ernst Fehr & Simon Gaechter, . "Cooperation and Punishment in Public Goods Experiments," IEW - Working Papers 010, Institute for Empirical Research in Economics - University of Zurich.
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  14. Louis Putterman & Christopher M. Anderson, 2003. "Do Non-strategic Sanctions Obey the Law of Demand? The Demand for Punishment in the Voluntary Contribution Mechanism," Working Papers 2003-15, Brown University, Department of Economics.
  15. Ernst Fehr & Simon Gaechter, 2003. "Altruistic Punishment in Humans," Microeconomics 0305006, EconWPA.
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  17. Jean-Robert Tyran & Lars P. Feld, 2005. "Achieving Compliance when Legal Sanctions are Non-Deterrent," CREMA Working Paper Series 2005-17, Center for Research in Economics, Management and the Arts (CREMA).
  18. Ernst Fehr & Simon Gaechter, . "Fairness and Retaliation: The Economics of Reciprocitys," IEW - Working Papers 040, Institute for Empirical Research in Economics - University of Zurich.
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  20. 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).
  21. Kenneth S. Chan & Robert Godby & Stuart Mestelman & R. Andrew Muller, 1998. "Crowding Out Voluntary Contributions to Public Goods," McMaster Experimental Economics Laboratory Publications 1998-01, McMaster University.
  22. Theodore Groves & John Ledyard, 1976. "Optimal Allocation of Public Goods: A Solution to the 'Free Rider Problem'," Discussion Papers 144, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  23. Falkinger, Josef, 1996. "Efficient private provision of public goods by rewarding deviations from average," Journal of Public Economics, Elsevier, vol. 62(3), pages 413-422, November.
  24. Yaw Nyarko & Andrew Schotter, 2002. "An Experimental Study of Belief Learning Using Elicited Beliefs," Econometrica, Econometric Society, vol. 70(3), pages 971-1005, May.
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  26. 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.
  27. Huck, Steffen & Weizsacker, Georg, 2002. "Do players correctly estimate what others do? : Evidence of conservatism in beliefs," Journal of Economic Behavior & Organization, Elsevier, vol. 47(1), pages 71-85, January.
  28. Andreoni, James, 1993. "An Experimental Test of the Public-Goods Crowding-Out Hypothesis," American Economic Review, American Economic Association, vol. 83(5), pages 1317-27, December.
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  30. 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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