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Club Enlargement: Early Versus Late Admittance

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  • Burkart, Mike
  • Wallner, Klaus

Abstract

We develop an incomplete contract model to analyse 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 conditional 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 member is admitted early, and a more advanced one, 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.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2600.

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Date of creation: Nov 2000
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Handle: RePEc:cpr:ceprdp:2600

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

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References

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Citations

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Cited by:
  1. Daron Acemoglu & Georgy Egorov & Konstantin Sonin, 2013. "Political Economy in a Changing World," Levine's Working Paper Archive 786969000000000803, David K. Levine.
  2. Daron Acemoglu & Georgy Egorov & Konstantin Sonin, 2012. "Dynamics and Stability of Constitutions, Coalitions, and Clubs," American Economic Review, American Economic Association, vol. 102(4), pages 1446-76, June.
  3. Berglöf, Erik & Burkart, Mike & Friebel, Guido & Paltseva, Elena, 2008. "Widening and Deepening: Reforming the European Union," CEPR Discussion Papers 6672, C.E.P.R. Discussion Papers.
  4. Wallner, Klaus, 2003. "Specific investments and the EU enlargement," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 867-882, May.
  5. Michael Kunin, 2004. "Sequencing of Club Enlargement: "big bang," "gradualism," and internal reform," CERGE-EI Working Papers wp232, The Center for Economic Research and Graduate Education - Economic Institute, Prague.

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