2025/03/09 by Alejandro Caparrós, Esther Blanco, Michael Finus
Decision Sciences · Economics, Econometrics and Finance · Social Sciences · #Economic theories and models #Experimental Behavioral Economics Studies #Game Theory and Applications
paper · doi:10.1016/j.jebo.2025.106943
openalex created_date 2025/03/09 · openalex publication_date 2025/03/09 · openalex updated_date 2026/07/23
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.