Endogenous Group Formation via Unproductive Costs

Jason Anthony Aimone · Laurence R. Iannaccone · Michael D. Makowsky · Jared Rubin

93 citations0/0 files storedThe Review of Economic Studies

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Experimental Behavioral Economics Studies Game Theory and Voting Systems Evolutionary Game Theory and Cooperation

Abstract

Sacrifice is widely believed to enhance cooperation in churches, communes, gangs, clans, military units, and many other groups. We find that sacrifice can also work in the lab, apart from special ideologies, identities, or interactions. Our subjects play a modified VCM game—one in which they can voluntarily join groups that provide reduced rates of return on private investment. This leads to both endogenous sorting (because free-riders tend to reject the reduced-rate option) and substitution (because reduced private productivity favours increased club involvement). Seemingly unproductive costs thus serve to screen out free-riders, attract conditional cooperators, boost club production, and increase member welfare. The sacrifice mechanism is simple and particularly useful where monitoring difficulties impede punishment, exclusion, fees, and other more standard solutions.

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