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Club Enlargement: Early Versus Late Admittance

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  • Klaus Wallner
  • Mike Burkart

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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 members, but reforms 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, wealth 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 ate. Moreover, poor applicants extract rents that increase in the ration 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, and applicants 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 Financial Markets Group in its series FMG Discussion Papers with number dp359.

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Date of creation: Sep 2000
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Handle: RePEc:fmg:fmgdps:dp359

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Web page: http://www.lse.ac.uk/fmg/

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Cited by:
  1. Konstantin Sonin & Georgy Egorov & Daron Acemoglu, 2008. "Dynamics and Stability of Constitutions, Coalitions and Clubs," 2008 Meeting Papers 314, Society for Economic Dynamics.
  2. Konstantin Sonin & Georgy Egorov & Daron Acemoglu, 2013. "Political Economy in a Changing World," 2013 Meeting Papers 386, Society for Economic Dynamics.
  3. Wallner, Klaus, 2003. "Specific investments and the EU enlargement," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 867-882, May.
  4. 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.
  5. 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.

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