Club Enlargement: Early Versus Late Admittance

45 Pages Posted: 7 Dec 2000

See all articles by Mike Burkart

Mike Burkart

Swedish House of Finance; London School of Economics and Political Science, Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Klaus Wallner

Oregon State University - Department of Applied Economics; Centre for Economic Policy Research (CEPR); Stockholm School of Economics - Stockholm Institute of Transition Economics (SITE)

Date Written: September 2000

Abstract

We develop an incomplete contract model to analyze the enlargement strategy of a club. An applicant is characterized by his wealth and the degree of conformity with the club standard. The club gains only from a fully reformed new member, but reform is costly. The club chooses between early admittance, where it can enforce reform through its partial control power, and late admittance, where entry is conditioned on completed reform. Under the optimal enlargement strategy of the club, wealthy applicants pay an entrance fee and enter early, and poor applicants enter in reversed order: A less advanced is admitted early and a more advanced late. Moreover, poor applicants extract rents that increase in the ratio of reform distance to wealth. If the club can impose a deadline for late entry, it can eliminate all rents with stage financing. In the dynamic game, renegotiation undermines the viability of the late admittance strategy. In the finite game, the applicant's rent from a late offer is non-monotonic in his reform distance and the ability to deteriorate his reform status strategically need not be detrimental to the club.

Keywords: Club Theory, Incomplete Contracts, Reform Incentives, Governance

JEL Classification: D71, G30

Suggested Citation

Burkart, Mike C. and Wallner, Klaus, Club Enlargement: Early Versus Late Admittance (September 2000). Available at SSRN: https://ssrn.com/abstract=248994 or http://dx.doi.org/10.2139/ssrn.248994

Mike C. Burkart (Contact Author)

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

London School of Economics and Political Science, Department of Finance ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

HOME PAGE: http://www.cepr.org/default_static.htm

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Klaus Wallner

Oregon State University - Department of Applied Economics ( email )

213 Ballard Extension Hall
Corvallis, OR 97331-4501
United States
(541) 737-1406 (Phone)
(541) 737-2563 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Stockholm School of Economics - Stockholm Institute of Transition Economics (SITE) ( email )

P.O. Box 6501
S-113 83 Stockholm, 11383
Sweden
+46 8 7369680 (Phone)
+46 8 316422 (Fax)

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