American Economic Review: Vol. 99 No. 4 (September 2009)


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Institution Formation in Public Goods Games

Article 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.99.4.1335


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)

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Kosfeld, Michael (Johann Wolfgang Goethe U Frankfurt and IZA, Bonn)
Okada, Akira (Hitotsubashi U)
Riedl, Arno (Maastricht U and CESifo, Munich)

JEL Classifications

C72: Noncooperative Games
D02: Institutions: Design, Formation, and Operations
H41: Public Goods

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