The Fear of Exclusion: Individual Effort when Group Formation is Endogenous

To secure their membership in a popular group, individuals may contribute more to the group's local public good than they would if group formation were exogenous. Those in the most unpopular group do not have this incentive to contribute. This may result in substantial differences in individual effort level between groups. Our model thus provides one explanation for the existence of group-specific behavioral norms. A principal will prefer exogenous or endogenous group formation depending on whether he prefers high or low levels of the local public good. We analyze two stylized examples: social interaction in schools, and multiple-task teamwork. Copyright The editors of the "Scandinavian Journal of Economics" 2007 .