Endogenous emergence of institutions to sustain cooperation ∗

Formal and informal institutions, such as laws and social norms, are pervasive in daily life. They help maintain cooperation by coordinating and constraining individuals’ behaviors. However, our understanding of the comparative benefits and the endogenous emergence of institutions remains limited. Here, we study the emergence and performance of sanctioning institutions in a public goods context when individuals are free to migrate between different institutions. We show experimentally that efficient peer and centralized sanctioning emerge as dominant institutions that immediately generate and maintain high levels of cooperation without much need for costly punishment. The quick establishment of high cooperation is due to both the self-selection of prosocial individuals into these institutions and the institutions’ intrinsically beneficial properties. In addition, voluntary migration into the centralized sanctioning institution leads to the selection of stable prosocial leaders who refrain from antisocial punishment, while remnants of antisocial punishment still exist under peer punishment.