Club-in-The-Club: Reform Under Unanimity

43 Pages Posted: 27 Dec 2006 Last revised: 4 Dec 2018

See all articles by Erik Berglöf

Erik Berglöf

Institute of Global Affairs, London School of Economics and Political Science

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)

Guido Friebel

Goethe University Frankfurt; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Elena Paltseva

Stockholm Institute of Transition Economics (SITE); New Economic School (NES)

Date Written: July 12, 2009

Abstract

In many organizations, decisions are taken by unanimity giving each member veto power. We analyze a model of an organization in which members with heterogenous productivity privately contribute to a common good. Under unanimity, the least efficient member imposes her preferred effort choice on the entire organization. In the presence of externalities and an incomplete charter, the threat of forming an “inner organization” can undermine the veto power of the less efficient members and coerce them to exert more effort. We also identify the conditions under which the threat of forming an inner organization is executed. Finally, we show that majority rules effectively prevent the emergence of inner organizations.

Keywords: organizations, public goods, EU integration

JEL Classification: D2, D7, P4

Suggested Citation

Berglöf, Erik and Burkart, Mike C. and Friebel, Guido and Paltseva, Elena, Club-in-The-Club: Reform Under Unanimity (July 12, 2009). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 149/2007. Available at SSRN: https://ssrn.com/abstract=953799 or http://dx.doi.org/10.2139/ssrn.953799

Erik Berglöf

Institute of Global Affairs, London School of Economics and Political Science ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Mike C. Burkart

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 ECARES ULB CP 114
B-1050 Brussels
Belgium

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

Guido Friebel (Contact Author)

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Elena Paltseva

Stockholm Institute of Transition Economics (SITE) ( email )

P.O. Box 6501
S-113 83 Stockholm, 11383
Sweden

New Economic School (NES) ( email )

100A Novaya Street
Moscow, Skolkovo 143026
Russia

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