Endogenous Group Formation via Unproductive Costs

Abstract

How and why do groups form? In many cases, group formation is endogenous to the actions that individual members take and the norms associated with these actions. In this paper, we conduct an experiment that allows groups to form endogenously in the context of the classic voluntary contribution mechanism public goods game. We identify unproductive costs – “sacrifice” – as a mechanism for endogenous group formation, a result which is consistent with the “sacrifice and stigma” theory of religious groups. We find that changes in relative prices (between private and public goods) act to screen out free-riders, subjects who choose high-sacrifice groups contribute more to the public good once in these groups, and moderate welfare gains are available to those who voluntarily incur unproductive costs.

Keywords: Endogenous Group Formation, Laboratory Experiment, Free Riding, Public Goods Game, Voluntary Contribution Mechanism, Sacrifice, Unproductive Costs

JEL Classification: C92, D71, H41, Z12