Peer Discipline and Incentives Within Groups

We investigate how a collusive group can sustain non-Nash actions by enforcing internal discipline through costly peer punishment. We give a simple and tractable characterization of schemes that minimize discipline costs while preserving incentive compatibility. We apply the model to a public goods contribution problem. We nd that if the per-capita bene t from the public good is low, then regardless of whether peer discipline is feasible or not only small groups will contribute to the good. If the public good bene t is signi cant but peer discipline is infeasible it remains the case that only small groups contribute. On the other hand, if the public good bene t is signi cant but peer discipline is feasible then full contribution takes place regardless of group size. We reconcile this result with Olson's idea that small groups are more e ective by considering the case where the per-capita bene t of the public good varies with group size. JEL Classi cation Numbers: C72 Noncooperative Games D7 Analysis of Collective Decision-Making D72 Political Processes: Rent-Seeking, Lobbying, Elections, Legislatures, and Voting Behavior