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Club Enlargement: Early Versus Late Admittance

  • Klaus Wallner
  • Mike Burkart

    ()

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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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
Contact details of provider: Web page: http://www.lse.ac.uk/fmg/

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