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State or nature? Endogenous formal versus informal sanctions in the voluntary provision of public goods

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Abstract

We investigate the endogenous formation of sanctioning institutions supposed to improve efficiency in the voluntary provision of public goods. Our paper parallels Markussen et al. (Rev Econ Stud 81:301–324, 2014) in that our experimental subjects vote over formal versus informal sanctions, but it goes beyond that paper by endogenizing the formal sanction scheme. We find that self-determined formal sanctions schemes are popular and efficient when they carry no up-front cost, but as in Markussen et al. informal sanctions are more popular and efficient than formal sanctions when adopting the latter entails such a cost. Practice improves the performance of sanction schemes: they become more targeted and deterrent with learning. Voters’ characteristics, including their tendency to engage in perverse informal sanctioning, help to predict individual voting.

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Notes

  1. Some recent contributions on sanction systems in which a central or specialized agent is the only one empowered to sanction are discussed and compared to decentralized or informal sanction schemes by Nosenzo and Sefton (2014). In our paper, we consider only those centralized sanction schemes that are rule-based, as opposed to ones that empower a central agent to use his or her discretion. We defer discussion of “pool punishment” (Sigmund et al. 2010) until the next section.

  2. To be sure, the idea that formal sanctions are more certain than informal ones does not always hold. A government might be inept, corrupt, or lacking in enforcement capacity, whereas if most members of a group were to embrace the goal in question, informal sanctioning may be a highly predictable response to norm violation.

  3. To be sure, models assuming infinite repetition are often applicable, because last periods can be unpredictable and reputations may carry into new settings. However, finite repetition can also be argued to characterize a variety of real world circumstances, and for an initial exploration, there are advantages to confronting the clear predictions of the finite repetition model with empirical observations in a controlled setting.

  4. It is true that there exist many subgame perfect equilibria with non-pivotal voting, under which some subjects vote for option (a). However, the possibility of errors and absence of opportunities to communicate suggests that they would reject weakly dominated choices and vote for option (b) (trembling-hand perfect equilibrium).

  5. Herrmann et al. (2008) refer to the overlapping phenomenon of a group member punishing one whose contribution was higher than her own as “anti-social punishment”.

  6. Also closely related is Zhang et al. (2014), which we discuss it briefly in footnote 26, below.

  7. Because of the greater overall complexity of our design, we simplified choices regarding the formal scheme relative to those in Putterman et al., reducing the number of decisions required from three to two. In particular, subjects in that paper but not the present one are asked to determine the scope of a potentially penalty-free range (“exemption”), whereas this possibility is not mentioned and hence the exemption range is automatically of size zero in our design.

  8. For example, subjects in Gürerk et al., Ertan et al. and Markussen et al. show initial reluctance to adopt IS. If IS is beneficial to most subjects in practice, then by having subjects experience IS early on exogenously, the 3-Vote treatments might induce a higher proportion of votes for it than do the 6-Vote ones, with voting from the start.

  9. While group size, endowments, and MPCR are identical in our study and Markussen et al. our fixed costs of 0 and 5 differ from theirs, 2 and 8, allowing in an approximate sense for a kind of meta-robustness check. In the event, both studies find similar differences between their low (0 or 2) and their high (5 or 8) cost treatments, while between the two studies, the share of cooperative surplus needing to be spent by each subject in order to adopt FS includes 0 % (cost of 0), 10 % (2), 25 % (5) and 40 % (8). Unlike our design, however, subjects in Markussen et al. face no variable cost of FS (see below).

  10. In all treatments, subjects are informed at the outset about the number of phases and periods and that they will interact in the same group of five anonymous participants throughout. In 3-Vote treatments, subjects learn about the conditions in four distinct sets of instructions, one before each phase of exogenous play and one before the start of voting between schemes, whereas in 6-Vote treatments, they receive one set of instructions before the initial phase and a second set of instructions explaining all of the remaining elements before the second phase. See the Appendix for further details.

  11. See Nikiforakis and Normann (2008) on the relation between efficiency and the cost ratio P, including at a 1:4 ratio. This ratio is also used in numerous studies, including Page et al. (2005), Bochet et al. (2006), Önes and Putterman (2007), and Sutter et al. (2010). An effective ratio of 1:4 or more often obtains for the first point of punishment i assigns to j in Fehr and Gächter (2000) and in the numerous experiments adopting its punishment schedule. Markussen et al. (2014) mainly use the same 1:4 ratio but also consider robustness to lower sanction effectiveness, finding surprisingly little effect.

  12. In practice, maximum punishment is rare and nullifies first-stage incomes only occasionally. For example, of the 1090 instances in which a subject i punished another subject j, only 5 (0.5 %) involved giving 10 points of punishment. Punishment received exceeded first stage earnings in only 23 of 2,960 subject-periods (0.8 %). Finally, punishment almost never resulted in net losses to the punisher. Only 5 of the 2,960 subject-periods (0.2 %) under IS saw a subject incur negative earnings for the period, and all subjects had strictly positive earnings overall.

  13. If the fixed costs of FS can be thought of as representing among other things, costs of building and maintaining prisons and court houses, the variable ones might correspond to the costs of pursuing criminals and conducting trials, which depend on how many rule violations occur. We made the ratio the same for both kinds of sanctions and referred to the uniformity of 1:4 ratio under the two schemes in the instructions so that the difference in variable cost per sanction would not in itself influence subjects’ votes (see Appendix A).

  14. p i  = r − C i if contributing to the public account is penalized.

  15. Our online Appendix provides the full instructions for these tasks. The indicators constructed from them are as in Putterman et al. (2011). An exception to the statement that all subjects completed these tasks concerns subjects in the Fuller Information treatments discussed at the end of Sect. 4. The IQ and political orientation questions were left out of those treatments to conserve time.

  16. An experimenter read all instructions aloud as participants read along. Subjects answered control questions after each set of instructions to test comprehension. In 3-Vote treatments, questions were taken and answered after the reading of instructions before each of phases 1 though 4. In 6-Vote treatments, questions were taken and answered after the reading of instructions before phases 0 and 1, and in BASELINE, after the reading of the only instructions, those before phase 1. The experiment was programmed in z-Tree (Fischbacher 2007).

  17. All subjects also earned a show-up fee of $5.00. In the IQ portion completed by the 300 subjects in the main treatments, earnings averaged $2.20.

  18. At the individual level, in cases in which formal sanctions were directed at contributing to the private accounts, 71.3 % of votes were for the 1.2 rate, 5.4 % for 0.8, 4.5 % for 0.4 and 18.9 % for 0.0.

  19. See Appendix Table B.2 (d). In our working paper, we discuss regressions using individual characteristics to predict subjects’ votes on the sanction rate when contributions to the private accounts are fined; see Appendix Table B.4. Estimates in several of the regressions suggest that either higher IQ or more conditionally cooperative subjects or both tended to vote for higher sanction rates. While the number of periods and groups in which contributions to the public account were sanctioned was too small to analyze using regressions, we note that only 15 % of the relevant votes on rates were for positive sanction rates, and that those votes came disproportionately from participants who were perverse punishers during play under IS.

  20. The fact that contributions fluctuate without trend during periods 5–18 is also not unusual given the partner matching protocol in which there may be attempts to restart cooperation, possibly facilitated by the pause in play following each set of four periods (see again Andreoni 1988).

  21. The difference is significant in Phase 2 and also in Phase 3 for the 3-Vote treatments without administrative cost, but not for those with that cost. The test can’t be carried out for the 6-N treatment because only one group voted for IS. See Appendix Table B.8.

  22. The calculation and test includes any group using IS in at least two phases, regardless of whether exogenous or endogenous. We also tested for a trend in earnings under IS by estimating a linear regression whose dependent variable is average earnings per group per phase using IS, and whose independent variable is the number of phases the group has used IS thus far {=1, 2, …}. We include group fixed effects. The number of phases the group has used IS obtains a positive coefficient of 1.75 which is significant at the 1 % level.

  23. Average conditional contribution is simply the average of the individual’s 21 entries in the form indicating what he or she chooses to contribute assuming others on average contribute 0, 1, …, 20. While Fischbacher et al. (2001) classify subjects as conditional cooperators, free riders, etc., in Putterman et al. (2011) we find average conditional contribution to be as good an indicator of conditional willingness to cooperate as individual type dummies or other measures based on the conditional contribution schedule.

  24. Subjects in the comparison treatment had not participated in any other treatment and with high likelihood had no knowledge that similar experiments had been conducted that included voting. The instructions described both IS and FS schemes and indicated that one or the other would be assigned in any given phase, with the assignment not being influenced by subjects’ behaviors.

  25. We report Mann–Whitney tests at group level in Appendix Table B.12. We test the group-level observations of each phase separately so that cross-sectional observations in each test are independent of one another, although a given group’s observations are not independent across phases. Markussen et al. (2014) also find contributions to be significantly higher in endogenously chosen than in exogenously imposed IS. In their data, the difference is statistically significant at the 5 % level in a two-tailed test.

  26. There are differences as well as similarities to the results in Zhang et al. There, subjects choose between IS and a more centralized type of “pool punishment” by voting with their feet, similar to subjects in Gürerk et al. (2006), whereas in our majority voting setup a minority must live with the preferred institution of a group’s majority. Zhang et al.’s pool punishment resembles efficiently targeted FS in that it targets all free riders and calls for payment up front even if no free riding occurs, but differs from FS in that contributions to the punishment pool remain individual decisions.

  27. Differences include that (a) Nikiforakis’s subjects have a stage in which counter-punishing is the only available activity immediately follows first-order punishing, whereas our subjects can only counter-punish in the following or later periods using the same punishment stage as is used for reacting to contributions; (b) Nikiforakis’s subjects learn only of punishments aimed at themselves and thus their only higher-order punishment option is counter-punishment, whereas our subjects learn of all bi-lateral punishments in their group, so what Denant-Boemont et al. (2007) call “punishment enforcement” is also possible; and (c) Nikiforakis’s subjects’ identities are scrambled each period, whereas our subjects’ identities remain visible, so higher-order punishment can take place over the course of several periods. Difference (a) may reduce the degree of counter-punishment in a “hot state,” as one referee put it, or may reduce “experimenter demand” for counter-punishment, as Kamei and Putterman (2013) suggest. With respect to difference (b), our design resembles the “full information” treatment in Denant-Boemont et al. The effects of differing ways of making opportunities for higher-order punishment available to subjects are explored by both of the latter papers. Kamei and Putterman find that a treatment closely resembling that of Nikiforakis (2008) is the only one of six higher-order punishment treatments that achieves lower efficiency than treatments with first-order punishment only. However, they do not explore treatments that permit long sequences of dedicated counter-punishment stages, as do studies of “feuding” (e.g., Nikiforakis and Engelmann 2011).

  28. To be sure, uncooperative majorities may be found in some settings, as the results of Herrmann et al. (2008) suggest. How voting outcomes differ across societies is an interesting topic for future research.

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Authors and Affiliations

  1. Bowling Green State University, Bowling Green, OH, USA

    Kenju Kamei

  2. Department of Economics, Box B, Brown University, Providence, RI, 02912, USA

    Louis Putterman

  3. University of Vienna, Vienna, Austria

    Jean-Robert Tyran

  4. University of Copenhagen, Copenhagen, Denmark

    Jean-Robert Tyran

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  1. Kenju Kamei
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  2. Louis Putterman
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Correspondence to Louis Putterman.

Additional information

We wish to thank the Danish research council (FSE) and the Austrian Science Fund (FWF project no. S10307-G16) for financial support. We are grateful to two anonymous referees for their detailed comments and suggestions, and we likewise thank participants at the Economic Science Association meeting in July, 2010 in Copenhagen, XVIth IEA World Congress in July, 2011 in Beijing and at workshops at Brown University and George Mason University for their helpful comments.

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Kamei, K., Putterman, L. & Tyran, JR. State or nature? Endogenous formal versus informal sanctions in the voluntary provision of public goods. Exp Econ 18, 38–65 (2015). https://doi.org/10.1007/s10683-014-9405-0

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