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The Good, the Bad and the Ugly: Agent Behavior and Efficiency in Open and Closed Organizations

33 Pages Posted: 29 Jun 2004  

Duncan M. Holthausen

North Carolina State University - Department of Economics

Theofanis Tsoulouhas

University of California-Merced, School of Social Sciences, Humanities & Arts, The Ernest & Julio Gallo Management Program

Abstract

Current literature has largely ignored the fact that some organizations are highly selective when admitting new agents while others are more open. In addition, some organizations audit or sort agent behavior within the organization more aggressively than others. One might expect a priori that closed, highly selective, organizations would always be more efficient because they screen out the worst types, which could lead to better agent behavior. We show that this is not the case. Specifically, when agent behavior in equilibrium is uniform across organizations (i.e., when the number of agents behaving the same way is identical), closed organizations are inefficient. However, when agent behavior varies across organizations, closed organizations may or may not be inefficient, depending on net payoffs to the organization and the agents. Our analysis implies that organizations should choose the open type when screening or sorting costs are high, when there is a high frequency of good agent types in the population, when agent misbehavior does not reduce output significantly, and when penalties for misbehavior
are large.

Keywords: Asymmetric information, organization theory, efficiency, sorting, screening

JEL Classification: C70, D82, L22

Suggested Citation

Holthausen, Duncan M. and Tsoulouhas, Theofanis, The Good, the Bad and the Ugly: Agent Behavior and Efficiency in Open and Closed Organizations. Economic Theory, Forthcoming. Available at SSRN: https://ssrn.com/abstract=559168

Duncan M. Holthausen

North Carolina State University - Department of Economics ( email )

Raleigh, NC 27695-8110
United States

Theofanis Tsoulouhas (Contact Author)

University of California-Merced, School of Social Sciences, Humanities & Arts, The Ernest & Julio Gallo Management Program ( email )

Merced, CA 95343
United States
209-228-4640 (Phone)

HOME PAGE: http://tsoulouhas.info

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