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Abstract
When every individual’s effort imposes negative externalities, self-interested behavior leads to socially excessive effort. To curb these excesses when effort cannot be monitored, competing output-sharing partnerships can form. With the right-sized groups, aggregate effort falls to the socially optimal level. We investigate this theory experimentally and find that while it makes correct qualitative predictions, there are systematic quantitative deviations, always in the direction of the socially optimal investment. Using data on subjects’ conjectures of each other’s behavior we investigate altruism, conformity and extremeness aversion as possible explanations. We show that deviations are consistent with both altruism and conformity (but not extremeness aversion).
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