Agreements with reciprocity: Co-financing and MOUs

Institutions for co-financing agreements often exist to encourage public good investment. Can such frameworks deliver maximal investment when agents are motivated by reciprocity? We demonstrate that indeed they can, but not how one might expect. If maximal investment is impossible in the absence of the institution and public good returns are high, then an agreement signed by all parties cannot lead to full investment. However, if all parties reject the agreement, then full investment is attainable via a gentlemen's agreement or memorandum of understanding (MOU). Agreement institutions may thus do more than just facilitate the signing of binding agreements; they may play a critical role in igniting informal cooperation underpinned by reciprocity.