Club-in-the-club: Reform under Unanimity
by Elena Paltseva (with Erik Berglof, Mike Burkart and Guido Friebel), published in the Journal of Comparative Economics
In many organizations, decisions are taken by unanimity giving each member veto power. We analyze a model of an organization in which members with heterogeneous productivity privately contribute to a common good. Under unanimity, the least efficient member imposes her preferred effort choice on the entire organization. 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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Please find the published version of the paper on ScienceDirect.