Club Enlargement: Early Versus Late Admittance1

We develop an incomplete contract model to analyze the enlargement strategy of a club facing a membership applicant. Wealth and the degree of conformity with the club’s standards de...ne the applicant’s type. Only a fully conforming entrant bene...ts the club, but conformity is a pure cost to the applicant. The club choses between early admittance, using its institutions to monitor the reform process, and late admittance conditional on conformity. Wealthy candidates are willing to pay a high entrance fee to obtain the undiscounted membership bene...ts under early entry. Poor applicants enter in reversed order: A less advanced type is admitted early and reforms as member, while a more advanced enters late after it has reformed. Moreover, the agency cost increases 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 commit not to renegotiate, a stage-...nanced late o¤er eliminates the agency costs. Repetition of the game destroys the credibility of the threat not to re...nance and increases the agency costs under the late o¤er.