The Emergence of Institutions

Santiago Sanchez-Pages, Stephane Straub

Research output: Working paperDiscussion paper

Abstract

This paper analyzes how institutions aimed at coordinating economic interactions may appear. We build a model in which agents play a prisoners’
dilemma game in a hypothetical state of nature. Agents can delegate the
task of enforcing cooperation in interactions to one of them in exchange for a
proper compensation. Two basic commitment problems stand in the way of
institution formation. The first one is the individual commitment problem
that arises because an agent chosen to run the institution may prefer to renege
ex post. The second one is a “collective commitment” problem linked to
the lack of binding agreements on the fee that will be charged by the centre
once it is designated. This implies first that a potentially socially efficient
institution may fail to arise because of the lack of individual incentives, and
second that even if it arises, excessive rent extraction by the institution may
imply a sub-optimal efficiency level, explaining the heterogeneity of observed
institutional arrangements. An institution is less likely to arise in small
groups with limited endowments, but also when the underlying commitment
problem is not too severe. Finally, we show that the threat of secession by
a subset of agents may endogenously solve part of the second commitment
problem.
Original languageEnglish
PublisherEdinburgh School of Economics Discussion Paper Series
Number of pages35
Publication statusPublished - Dec 2006

Publication series

NameESE Discussion Papers
No.148

Keywords

  • institution
  • coordination
  • state of nature
  • secession
  • C72
  • D02
  • O17
  • Z13

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