How Does Clubs' Organizational Design Affect Competition Among Clubs?

Abstract

We analyze competition among clubs in which the status of club members is the crucial added value accruing to fellow club members through social interaction within the club (e.g. in country clubs, academic faculties, or internet communities). In the course of competition for new members, clubs trade off the effect of entry on average status of the club and candidates' monetary payment via an entrance fee. We show that the best candidates join the best clubs but they pay higher entrance fees than some lower ranking candidates. We distinguish among various decision rules and organizational set-ups, including majority voting, unanimity, and meritocracy. We find that, from a second-best welfare perspective, the unanimity rule implies inefficient exclusion of some candidates, while meritocracy and weighted majority voting lead to inefficient inclusion. Our main policy implication is that consensus-based clubs, such as many academic faculties in Europe, could improve the well-being of their members if they liberalized their internal decision making processes.

Keywords: Club theory, status organizations, design of decision making, collective action

JEL Classification: D71, L22, L31