Scandinavian Working Papers in Economics

Discussion Papers on Economics,
University of Southern Denmark, Department of Economics

No 8/2020: Endogenous Group Formation and its impact on Cooperation and Surplus Allocation - An Experimental Analysis

Sibilla Di Guida (), The Anh Han (), Georg Kirchsteiger (), Tom Lenaerts () and Ioannis Zisis ()
Additional contact information
Sibilla Di Guida: Department of Business and Economics, Postal: University of Southern Denmark, Campusvej 55, DK-5230 Odense M, Denmark
The Anh Han: School of Computing, Postal: Teesside University, Middlesbrough, Tees Valley, TS1 3BX, UK
Georg Kirchsteiger: ECARES, Postal: Université Libre de Bruxelles, Avenue Roosevelt 50, 114 Bruxelles, Belgium, CEPR, CESifo, and VCEE
Tom Lenaerts: Vrije Universiteit Brussel, Postal: MLG, Université Libre de Bruxelles and AI-lab, Boulevard du Triomphe, 212 Bruxelles, Belgium
Ioannis Zisis: MLG, Postal: Université Libre de Bruxelles, Boulevard du Triomphe, 212 Bruxelles, Belgium

Abstract: This paper investigates how endogenous group formation combined with the possibility of repeated interaction impacts cooperation within groups and surplus distribution. We developed and tested experimentally a Surplus Allocation Game where cooperation of four agents is needed to produce surplus, but only two have the power to allocate it among the group members. Different matching procedures were used to test the impact of exogenous vs. endogenous group formation. Our results show that repeated interaction with the same partners (endogenous group formation) leads to a self-selection of agents into groups with different life-spans, whose duration is correlated with the behavior of both distributors and receivers. While behavior at the group level is diverse for surplus allocation and amount of cooperation, aggregate behavior is instead similar when groups are exogenously or endogenously formed. Our results cast doubts whether the possibility of repeated interaction can lead to cooperation and efficient outcomes when the ex-post bargaining power about the surplus distribution is very unequal. Rather, it seems to amplify differences in the cooperation and distribution behavior across groups.

Keywords: Cooperation; surplus distribution; exogenous group formation; endogenous group formation

JEL-codes: C72; C92; D03

46 pages, August 20, 2020

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