American Economic Review Vol. 99 No. 4 2009

Institution Formation in Public Goods Games

Michael Kosfeld¹; Akira Okada²; Arno Riedl³

¹ Department of Economics and Business Administration, Johann Wolfgang Goethe-University, Grüneburgplatz 1, D-60323 Frankfurt am Main, Germany, and IZA. · ² Graduate School of Economics, Hitotsubashi University, Kunitachi, Tokyo 186-8601, Japan. · ³ Department of Economics, Faculty of Economics and Business Administration, Maastricht University, PO Box 616, NL-6200 MD Maastricht, the Netherlands, CESifo, and IZA.

Abstract

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.

DOI

10.1257/aer.99.4.1335

Volume

99

Issue

4

Pages

1335-1355

Language

en

Sources

openalex bibtex:phds-export.bib crossref

Cite

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