October, 2013

Endogenous Group Formation via Unproductive Costs

  • Jason Aimone

    Assistant Professor of Economics, Baylor University
  • Laurence Iannaccone

    Director, Institute for the Study of Religion, Economics, and Society, Chapman University
  • Michael D. Makowsky

    Assistant Professor of Economics, Clemson University
  • Jared Rubin

    Associate Professor, Chapman University
  • Michael D. Makowsky

  • and Jared Rubin

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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 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 favors 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.

Find the article at Oxford Journals.