Weak and Strong Formal Institutions in Resolving Social Dilemmas: Are They Double-Edged Swords?

Many modern societies sustain large-scale cooperation among strangers and maintain the provision of public goods through well-functioning top-down formal institutions. However, it is important to understand the differences between weak and strong formal institutions in achieving two key goals in social dilemma situations: sustaining socially beneficial equilibria and fostering individual prosocial behavior. Additionally, we need to examine what happens to cooperation when the credibility of a formal institution is undermined and what occurs when it ceases to function. In this novel experiment of a repeated public goods game, we explore the effects of an exogenous centralized punishment mechanism with a low probability, which serves as a weak formal institution, and compare it with a strong formal institution. Our findings are encouraging, as they demonstrate that even under a weak formal institution, relatively high levels of cooperation can be sustained. However, irrespective of whether the punishment probability for free riders is low or high, once the punishment mechanism is removed, cooperation breaks down to a similarly low level. This suggests that regardless of the strength of the formal institution, there is an alike effect of crowding out an individual’s intrinsic motivation for cooperation. Therefore, the application of a centralized punishment mechanism as a policy tool to promote cooperation, regardless of its strength, appears to be a double-edged sword: socially beneficial outcome and intrinsically motivated cooperation hardly can be attained simultaneously