IDEAS home Printed from
   My bibliography  Save this article

The good, the bad and the ugly: agent behavior and efficiency in open and closed organizations


  • Duncan Holthausen


  • Theofanis Tsoulouhas



This paper develops a novel model of agent behavior in organizations in order to compare the efficiency of “open” versus “closed” organizations. Closed organizations “screen” potential agents before admitting them while open organizations do not. Both have the option to “sort” (audit) individual behavior after observing aggregate outcome. Each agent is intrinsically “good,” “bad” or “ugly,” but can behave as any of the three types. Screening allows the organization to deny entry to the worst agent types, while sorting allows the organization to penalize opportunistic misbehavior by the agents. We show that both organizations may sort in equilibrium. When the sorting cost per agent is constant or exhibits economies of scale, surprisingly, both organizations sort the same number of agents, which leads agents of the same type to behave uniformly across organizations. However, agent behavior across intrinsic types may or may not be uniform. Interestingly, there is no equilibrium in which all agent types behave as good. When all agent types behave as bad or all behave as ugly, and an equilibrium exists in both organizations, closed organizations are less efficient from the organization’s perspective than open ones. When all agent types behave as ugly, closed organizations are socially inefficient as well. If agent behavior is a mixture of types, then closed organizations can be efficient because they screen out some of the worst agent types in advance. When organizations can precommit to a sorting frequency, more equilibria exist; for instance, all agent types may behave as good.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Duncan Holthausen & Theofanis Tsoulouhas, 2008. "The good, the bad and the ugly: agent behavior and efficiency in open and closed organizations," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 35(1), pages 73-97, April.
  • Handle: RePEc:spr:joecth:v:35:y:2008:i:1:p:73-97
    DOI: 10.1007/s00199-007-0216-9

    Download full text from publisher

    File URL:
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    1. Eric Maskin & Jean Tirole, 2004. "The Politician and the Judge: Accountability in Government," American Economic Review, American Economic Association, vol. 94(4), pages 1034-1054, September.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Asymmetric information; Organization theory; Efficiency; Sorting; Screening; D82; L22;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:joecth:v:35:y:2008:i:1:p:73-97. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.