Institution Formation in Public Goods Games

Michael Kosfeld, Akira Okada and Arno Riedl

No 2288, IZA Discussion Papers from Institute of Labor Economics (IZA)

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.

Keywords: sanctions; institutions; public goods; cooperation (search for similar items in EconPapers)
JEL-codes: C72 C92 D72 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2006-09
New Economics Papers: this item is included in nep-cbe, nep-cdm, nep-exp, nep-gth, nep-pbe and nep-soc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Published - published in: American Economic Review, 2009, 99 (4), 1335-1355

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https://docs.iza.org/dp2288.pdf (application/pdf)

Related works:
Journal Article: Institution Formation in Public Goods Games (2009)
Working Paper: Institution Formation in Public Goods Games (2006)
Working Paper: Institution Formation in Public Goods Games (2006)
Working Paper: Institution formation in public goods games (2006)
Working Paper: Institution Formation in Public Goods Games (2006)
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