Weak and Strong Formal Institutions in Resolving Social Dilemmas: Are They Double-Edged Swords?

Mekvabishvili, Rati (2023): Weak and Strong Formal Institutions in Resolving Social Dilemmas: Are They Double-Edged Swords? Published in: Journal of Behavioral Economics for Policy , Vol. 7, No. 2 (20 December 2023): pp. 11-20.

Abstract

Many modern societies sustain large-scale cooperation among strangers and maintain the provision of public goods through well-functioning top-down formal institutions. However, it is important to understand the differences between weak and strong formal institutions in achieving two key goals in social dilemma situations: sustaining socially beneficial equilibria and fostering individual prosocial behavior. Additionally, we need to examine what happens to cooperation when the credibility of a formal institution is undermined and what occurs when it ceases to function. In this novel experiment of a repeated public goods game, we explore the effects of an exogenous centralized punishment mechanism with a low probability, which serves as a weak formal institution, and compare it with a strong formal institution. Our findings are encouraging, as they demonstrate that even under a weak formal institution, relatively high levels of cooperation can be sustained. However, irrespective of whether the punishment probability for free riders is low or high, once the punishment mechanism is removed, cooperation breaks down to a similarly low level. This suggests that regardless of the strength of the formal institution, there is an alike effect of crowding out an individual’s intrinsic motivation for cooperation. Therefore, the application of a centralized punishment mechanism as a policy tool to promote cooperation, regardless of its strength, appears to be a double-edged sword: socially beneficial outcome and intrinsically motivated cooperation hardly can be attained simultaneously

• Item Type: MPRA Paper
• Language: English
• Keywords: formal institutions, public good, centralized punishment, crowding out, cooperation
• Subjects: C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C90 - General; D - Microeconomics > D0 - General > D02 - Institutions: Design, Formation, Operations, and Impact; H - Public Economics > H4 - Publicly Provided Goods > H41 - Public Goods

References

Arechar, A. A., Gächter, S. & Molleman, L. (2018). Conducting interactive experiments online. Experimental Economics 21(1), 99-131.

Attanasi, G., Boun My, K., Buso, M., & Stenger, A. (2020). Private investment with social benefits under uncertainty: The dark side of public financing. Journal of Public Economic Theory, 22(3), 769-820.

Baldassarri, D., & Grossman, G. (2011). Centralized sanctioning and legitimate authority promote cooperation in humans. Proceedings of the National Academy of Sciences, 108(27), 11023-11027.

Bénabou, R., & Tirole, J. (2006). Incentives and prosocial behavior. American Economic Review, 96(5), 1652-1678.

Bowles, S. & Polania-Reyes, S. (2012). Economic incentives and social preferences: substitutes or complements? Journal of Economic Literature 50(2), 368-425.

Engl, F., Riedl, A., & Weber, R. (2021). Spillover effects of institutions on cooperative behavior, preferences, and beliefs. American Economic Journal: Microeconomics, 13(4), 261-99.

Fehr, E. & Gachter, S. (2000). “Cooperation and Punishment in Public Goods Experiments.” American Economic Review 90(4), 980-994.

Frey, B. (2017). Policy consequences of pay-for-performance and crowding-out. Journal of Behavioral Economics for Policy, 1(1), 55-59.

Frey, B. S. & Jegen, R. (2001). Motivation crowding theory. Journal of Economic Surveys 15(5), 589-611.

Frohlich, N. & Oppenheimer, J. (2003). Optimal policies and socially oriented behavior: Some problematic effects of an incentive compatible device. Public Choice 117(3), 273-293.

Funk, P. (2007). Is there an expressive function of law? An empirical analysis of voting laws with symbolic fines. American Law and Economics Review 9(1), 135-159.

Galbiati, R. & Vertova, P. (2014). How laws affect behavior: Obligations, incentives, and cooperative behavior. International Review of Law and Economics 38, 48-57.

Gneezy, U., Meier, S. & Rey-Biel, P. (2011). When and why incentives (don't) work to modify behavior. Journal of Economic Perspectives 25(4), 191-210.

Gneezy, U. & Rustichini, A. (2000). Pay enough or don’t pay at all. The Quarterly Journal of Economics 115(3), 791-810.

Herrmann, B., Thoni, C., & Gachter, S. (2008). Antisocial punishment across societies. Science, 319(5868), 1362-1367.

Ledyard, J. O. (1995). Public goods: A survey of experimental research. In The Handbook of Experimental Economics, 111–194 (Ed.: J. Kagel & A. E. Roth). Princeton University Press.

Martimort, D., & Pouyet, J. (2008). To build or not to build: Normative and positive theories of public–private partnerships. International Journal of Industrial Organization, 26(2), 393-411.

Mekvabishvili, R. (2021a). Can Formal Institutions Lead to the Spillover Effect of Cooperation? Theoretical Economics Letters, 11, 186-193.

Mekvabishvili, R. (2021b). Centralized Punishment in Public Good Experiments. Dataset, Zenodo, DOI: https://doi.org/10.5281/zenodo.5033369

Nikiforakis, N. (2008). Punishment and counter-punishment in public good games: Can we really govern ourselves? Journal of Public Economics, 92(1-2), 91-112.

O’Gorman, R., Henrich, J., & Van Vugt, M. (2009). Constraining free riding in public goods games: designated solitary punishers can sustain human cooperation. Proceedings of the Royal Society B: Biological Sciences, 276(1655), 323-329.

Peysakhovich, A., & Rand, D. G. (2016). Habits of virtue: Creating norms of cooperation and defection in the laboratory. Management Science, 62(3), 631-647.

Putterman, L., Tyran, J. R., & Kamei, K. (2011). Public goods and voting on formal sanction schemes. Journal of Public Economics, 95(9-10), 1213-1222.

Stagnaro, M., N., Arechar, A., A. & Rand, D., G.; (2017). From Good Institutions to Generous Citizens: Top-Down Incentives to Cooperate Promote Subsequent Prosociality But Not Norm Enforcement. Cognition, 167, 212-254.

Tyran, J. R., & Feld, L. P. (2006). Achieving compliance when legal sanctions are non‐deterrent. Scandinavian Journal of Economics, 108(1), 135-156.