The Emergence of Institutions

Santiago Sánchez-Pagés and Stephane Straub

Edinburgh School of Economics Discussion Paper Series from Edinburgh School of Economics, University of Edinburgh

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.

Keywords: institution; coordination; state of nature; secession (search for similar items in EconPapers)
JEL-codes: C72 D02 O17 Z13 (search for similar items in EconPapers)
Pages: 37
Date: 2006-12
New Economics Papers: this item is included in nep-cba, nep-cbe, nep-cdm, nep-dev, nep-gth, nep-pol and nep-soc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: The Emergence of Institutions (2010)
Working Paper: The Emergence of Institutions (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:edn:esedps:148

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