Endogenous Institution Formation

Endogenous Institution Formation
David Kingsley, Assistant Professor, University of Massachusetts Lowell

Alleged market failure motivates the formation of institutions regulating individual behavior and enhancing welfare. Despite the ubiquity and importance of institutions little is known about their emergence. This experiment allows groups to choose both institutional deterrence and cost. To increase deterrence the group must incur increased cost, impacting individual relationships with formal institutions; e.g., to limit speeding or combat fraud, society has developed a variety of sanctioning institutions. These monitor behavior and administer legally agreed upon sanctions for observed infractions. If the institution is ineffective in altering behavior, then – absent corruption – theory suggests two options: additional resources to monitor behavior or increase sanctions. Consequently, higher sanction levels may be more efficient if fewer resources must be devoted to monitoring-enforcement. The experimental design examines these trade-offs to potentially inform public policy as to whether groups appear to always prefer efficiency, lower cost non-deterrent or higher cost institutions of deterrence. Experimental economics is uniquely capable of investigating the social formation of and behavior within formal institutions.