Endogenous group formation and efficiency: an experimental study

Abstract

We test a mechanism whereby groups are formed endogenously, through the use of voting. These groups play a public-goods game, where efficiency increases with group size (up to a limit, in one treatment). Information is provided about the contributions of others and it is feasible to exclude group members, exit one's group, or to form larger groups through mergers involving the consent of both merging groups. We find a great degree of success for this mechanism, as the average contribution rate is very high. The driving force appears to be the economies of scale combined with the awareness that bad behavior will result in (potentially-reversible) exclusion.