— DRAFT VERSION — The Great Divide: Inequality and Punishment in Public Goods Settings Martine Visser *† Martine.Visser@economics.gu.se and Justine Burns ‡ jburns@commerce.uct.ac.za May 2005 Abstract We explore the effect of income inequality on voluntary provision of public goods within nine South African fishing communities. A novel contribution of our work is illustrating the effect of social institutions such as peer punishment within unequal public goods settings. In the presence of peer sanctioning the positive effect of inequality on aggregate contributions is exaggerated. In both the treatments with and without punishment a seemingly perverse pattern emerge: burden sharing in providing the public good falls mainly on the poor or individuals with lower endowments in unequal treatments contributes a higher share of their income to the public good than those with higher endowments. We show that the lower endowment individuals have greater net gains from being in cooperative situations than those with higher endowments, resulting in more strategic behaviour. Moreover punishment is used more efficiently in unequal groups, effecting a redistribution of wealth from high endowment players to lower endowment players within these groups. JEL classification: C9,D63,H41,Q2 Keywords: Inequality, heterogeneity, cooperation, punishment, linear public goods 1 Introduction We examine the effect of inequality on behavioural outcomes in situations where individuals have to choose between self-interested motivations and pro-social norms that benefit the community as a whole. We are specifically interested to what extent social institutions such as peer sanctioning is successful as a self-imposed form of regulation when inequality is present. Previous research has shown that people resent being the ’sucker’ when engaged in the voluntary cooperation mechanism * G¨ oteborg University, Department of Economics, Telephone: +46 (0)31 773 1317. Address: Vasagatan 1, Box 640, 405 30 G¨ oteborg, Sweden. † We would like to thank the National Research Foundation of South Africa for funding the research, as well as Sida for funding Martine Visser’s studies. We appreciate the thoughtful comments by Olof Johansson-Stenman, Peter Martinsson, Jeffrey Carpenter, Malcolm Keswell, J.C. Cardenas, Abigail Barr, Samuel Bowles, and Murray Leibbrandt, as well as, friends and colleagues at the University of Cape Town and Gothenburg who participated in focus groups and seminars, and also participants at the SMYE conference 2005. Finally we are very grateful to our research assistants from U.C.T. and people from fishing communities who assisted in the research. ‡ University of Cape Town, School of Economics, Telephone: +27 (0)21 650 3757. Address: University of Cape Town,Private Bag, Rondebosch, 7700, South Africa. 1