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Club-in-the-Club: Reform under Unanimity

  • Erik Berglöf

    (European Bank for Reconstruction and Development)

  • Mike Burkart

    (Stockholm School of Economics)

  • Guido Friebel

    (Goethe-Universität Frankfurt)

  • Elena Paltseva

    (Department of Economics, University of Copenhagen)

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.

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Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 2009-07.

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Length: 37 pages
Date of creation: Jul 2009
Handle: RePEc:kud:epruwp:09-07
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