The detrimental effect of group size on institution formation

• The opportunity to form institutions helps to overcome collective actions problems. • Causal evidence on institution formation comes from lab experiments in small groups. • Modestly increasing group size leads to almost no institutions formed. • In larger groups, the voting rule impedes the formation of almost-grand institutions. • In larger groups, hold-outs are less likely to change their mind about membership. A solution for the provision of public goods is the formation of institutions that change the rules of the game, e.g., through sanctions or enforced cooperation commitments. While prior laboratory experiments document a positive effect of the opportunity to form such institutions on cooperation in small groups, groups in the field are typically much larger. We test the causal effect of group size on institution formation and show that institutions almost never form successfully as group size increases from four to just eight or twelve individuals. Prior results on the formation of institutions, such as those of Kosfeld et al. [2009], thus do not generalize to larger groups. Our findings document that individuals are less willing to be bound by the rules of the institution, while willing individuals struggle to reach a unanimous decision as group size increases.