Wallner, Klaus: Club Enlargement: Early Versus Late Admittance
World Conference Econometric Society, 2000, Seattle

Mike Burkart, SITE, Stockholm School of Economics
Klaus Wallner, Stockholm School of Economics
Club Enlargement: Early Versus Late Admittance
Session: C-1-14  Friday 11 August 2000  by Wallner, Klaus
Within an incomplete contract framework, we analyze the enlargement strategy of a club facing applicants that differ in wealth and reform status. While an applicant benefits from entry, the club only gains if the entrant makes an adjustment investment. The club has a choice between early admittance, using its limited internal enforcement powers to ensure reform, and late admittance conditional on prior reform. Wealthy candidates enter early as the club can charge a higher entrance fee for undiscounted membership benefits. For poor applicants, the club applies a reversed admittance order: A less advanced applicant is admitted early to reform as member, while a more advanced enters late after it has reformed. Moreover, the admittance rents increase in the ratio of reform distance to wealth. The viability of the late admittance strategy depends on the club's commitment ability. If the club can credibly commit to a stage-financing schedule, it can induce applicants to reform without overfunding. In the repeated game, the threat of denying additional funding is not credible, and more overfunding is required for reform.
Submitted paper full-text in .pdf

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