Club-in-The-Club: Reform Under Unanimity

Erik Berglof, Mike Burkart, Guido Friebel, Elena Paltseva

Europe,
Reform

Series number :

Serial Number:

149/2007

Date posted :

January 01 2007

Last revised :

November 27 2018

SSRN

Keywords

Organizations •
public goods •
EU integration

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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