Endogenous Group Formation via Unproductive Costs
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 reduced 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 favours 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.
The Review of economic studies