Endogenous And Costly Institutional Deterrence

Modern economies rely on central-authority institutions to regulate individual behaviour. Despite the importance of such institutions little is known about their formation within groups. In a public good experiment, groups selected the level of deterrence implemented by the institution, knowing that the administrative costs of the institution rose with the level of deterrence. Results suggest that groups readily self-impose costly deterrent formal institutions. The strictly deterrent institutions implemented here increased contributions sufficiently to completely offset the administrative cost and significantly increase earnings.