Democratic decisions establish stable authorities thatovercome the paradox of second-order punishment

Abstract

Individuals usually punish free riders but refuse to sanction thosewho cooperate but do not punish. This missing second-order peerpunishment is a fundamental problem for the stabilization ofcooperation. To solve this problem, most societies today haveimplemented central authorities that punish free riders and taxevaders alike, such that second-order punishment is fully established. The emergence of such stable authorities from individualdecisions, however, creates a new paradox: it seems absurd toexpect individuals who do not engage in second-order punishmentto strive for an authority that does. Herein, we provide a mathematical model and experimental results from a public goods gamewhere subjects can choose between a community with and withoutsecond-order punishment in two different ways. When subjects canmigrate continuously to either community, we identify a biastoward institutions that do not punish tax evaders. When subjectshave to vote once for all rounds of the game and have to accept thedecision of the majority, they prefer a society with second-orderpunishment. These findings uncover the existence of a democracypremium. The majority-voting rule allows subjects to committhemselves and to implement institutions that eventually lead toa higher welfare for all.