, Volume 16, Issue 3, pp 426-441
Date: 17 Nov 2012

Splitting leagues: promotion and demotion in contribution-based regrouping experiments

Abstract

The paper reports an experimental study on a promotion-demotion mechanism to mitigate the free-rider problem in a voluntary contribution setting. The mechanism hierarchically splits a group in two; we refer to one subgroup as the Major league and to the other as the minor league. The most cooperative subject of the minor league is switched with the least cooperative subject in the Major league. The results reveal a significant increase of cooperation levels in both leagues relative to the standard voluntary contribution mechanism. We argue that a lack of sequentially-rational beliefs about continuation payoffs in Major and minor leagues leads to higher equilibrium contributions. The data suggest beyond that, the promotion-demotion mechanism regroups subjects deliberately according to their cooperativeness.

We thank Jacob Goeree, two anonymous referees and seminar participants at Tucson and Magdeburg for helpful comments. Financial support from the Spanish Ministry of Education and Science (ECO2010-20584), Generalitat Valenciana (PROMETEO/2009/068) and Junta de Andalucíia (P07-SEJ-3261) is gratefully acknowledged. An earlier title of the paper has been “Vertically Splitting a Firm: Promotion and Relegation in a Team Production Experiment”.