American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Institution Formation in Public Goods Games
American Economic Review
vol. 99,
no. 4, September 2009
(pp. 1335–55)
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. (JEL C72, D02, H41)Citation
Kosfeld, Michael, Akira Okada, and Arno Riedl. 2009. "Institution Formation in Public Goods Games." American Economic Review, 99 (4): 1335–55. DOI: 10.1257/aer.99.4.1335Additional Materials
JEL Classification
- C72 Noncooperative Games
- D02 Institutions: Design, Formation, and Operations
- H41 Public Goods