24 Pages Posted: 6 Oct 2013
Date Written: July 11, 2013
Numerous non-profit organizations that contribute to collective goods also provide prestige to their members. Some of these institutions function as prestige clubs, with prestige levels and member contributions working as club goods and membership fees, respectively. We investigate the endogenous formation of prestige clubs. We show that the competitive equilibrium features prestige clubs and that competing club managers engage in a futile race for institutional aggrandizement. The competition, however, yields coordination benefits produced by internalization of positive and negative externalities within clubs. The competitive equilibrium is inefficient because clubs neglect external benefits and costs associated with their members’ contributions.
Keywords: prestige, clubs, non-profit organizations, charities, public goods
JEL Classification: D02, D62, D64, D71, H41
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