Self-Commitment-Institution and Cooperation in Overlapping Generations Games∗

This paper focuses on a two-period OLG economy with public imperfect observability over the intergenerational cooperative dimension. In this environment we study how a new mechanism, we call Self-Commitment-Institution (SCI), outperforms personal and community enforcement in achieving higher ex-ante effi ciency. If social norms with SCI are implemented, agents might voluntarely exert a perfectly observable unproductive action. As long as they reduce their marginal gains from deviation in terms of current utility, they also credibly self-commit on intergenerational cooperation. In a game with a small signal space when the monitoring technology is suffi ciently ineffective we show how social norms with SCI relaxes the inclination toward opportunistic behavior and sustain higher effi ciency compared to social norms without SCI. We quantify the value of SCI and perform several robustness tests. This paper offers a positive theory of unproductive practices, as costly rituals or civil services, which mitigate free-riding incentives out of the traditional theory of clubs. Instead of relying on positive returns from participatory crowding, wasteful practices are justified by the existence of imperfect monitoring technologies. JEL Classification: C70, D70, H40