Institution formation in weakest-link games

Alejandro Caparrós; Esther Blanco; Michael Finus

doi:10.1016/j.jebo.2025.106943

Institution formation in weakest-link games

Alejandro Caparrós, Esther Blanco, Michael Finus

Department of Economics

Research output: Contribution to journal › Article › peer-review

Abstract

We study the role of endogenous formation of institutions in overcoming coordination failures in weakest-link games with fixed neighborhoods. In our setting, institutions are weak and only form and make decisions by unanimity. Experimental results show that such institutions are formed and mitigate the coordination problem, raising equilibrium provision levels, but falling short of providing Pareto-optimal contributions. Given the multiplicity of Nash equilibria in weakest-link games, we consider several equilibrium refinements that allow for (small) errors by individuals. Without institutions, risk dominance and the Quantal Response Equilibrium (QRE) with (almost) perfectly rational agents select the worst equilibrium, while all equilibria are trembling-hand perfect and proper. With the possibility of forming an institution, all these concepts predict the Pareto-optimal equilibrium as the unique outcome. As we do not observe this outcome in our experimental results, only the Agent QRE model with bounded rationality can explain our data.

Original language	English
Article number	106943
Journal	Journal of Economic Behavior and Organization
Volume	233
Early online date	9 Mar 2025
DOIs	https://doi.org/10.1016/j.jebo.2025.106943
Publication status	E-pub ahead of print - 9 Mar 2025

Acknowledgements

We are grateful to the participants to the Workshop on Experimental Economics for the Environment in Hamburg, Workshop on Behavioural and Experimental Methods in Manchester, International Meeting on Experimental and Behavioral Social Sciences in Lisbon, AERNA Conference, EAERE Conference, and the Stony Brook International Game Theory Conference. Seminar participants at the Universities of Columbia, Innsbruck and Durham also provided helpful comments. Philipp Buchenauer provided excellent research assistance.

Funding

Financial support was provided by the Austrian Science Fund (Grant Numbers P 25973-G11 and P 32859) and the Spanish Ministry of Economy and Competitiveness (TrenGood, ECO2017-84461-R).

Keywords

Agent quantal response equilibrium
Coalition formation
Experimental economics
Minimum-effort game
Quantal response equilibrium
Weakest-link game

ASJC Scopus subject areas

Economics and Econometrics
Organizational Behavior and Human Resource Management

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10.1016/j.jebo.2025.106943Licence: CC BY

Cite this

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Institution formation in weakest-link games

Abstract

Acknowledgements

Funding

Keywords

ASJC Scopus subject areas

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