Voting with hands and feet: the requirements for optimal group formation

This paper studies the dynamics by which individuals with heterogeneous preferences partition themselves into groups. A novel experimental environment is developed to capture the tension between increasing returns to group size and attaining a group policy closest to an ideal point. Subjects can move freely between locations, with group policy either fixed by location or determined by member vote. A primary goal is to assess which of two stability concepts common to the group formation literature predicts which groups agents sort into. The same set of Nash stable partitions exist in each condition, with the efficient, strong Nash stable state requiring subjects to form heterogeneous groups and compromise on policy. I find that subjects who are only able to move between locations with fixed policies always over-segregate, rather than build efficient heterogeneous groups. When mobility is combined with the ability to vote on local policy, most subjects reach the efficient partition. This shows outcomes cannot be determined by considering the existence of stable states alone and that consideration must also be given to subtle aspects of the system dynamics. Further, it suggests that experiments may play an important role in understanding these group formation dynamics. Copyright Economic Science Association 2015