First in Village or Second in Rome?

Though individuals prefer to join groups with high quality peers, there are also advantages from being high up in the pecking order within a group. We show that sorting of agents in this environment results in an overlapping interval structure in the type space. Segregation and mixing coexist in a stable equilibrium. When transfers are possible our stable equilibrium corresponds to a competitive equilibrium in which agents bid for relative positions. The equilibrium entails too little segregation compared to the efficient allocation. A greater degree of egalitarianism within organizations leads to greater segregation across organizations, but can potentially improve the efficiency of equilibrium allocation. Since competition is most intense for agents with intermediate talent, effective personnel policies to attract talent differ systematically between high-quality and lowquality organizations. JEL Classification: C78, D83, M50 Corresponding Author: Ettore Damiano. Address: Department of Economics, University of Toronto, 150 St. George Street, Toronto, Ontario M5S3G7, Canada. Phone: (416) 946-5821. Fax: (416) 978-6713. E-mail: [email protected]. Acknowledgments: We thank Luis Garicano, John Hartwick, Tony Latter, Rich Romano, Aloysius Siow, Zhigang Tao, and Bruce Weinberg for helpful comments, and Priscilla Man and Ron Chan for able research assistance. We have also benefited from many comments and suggestions by the Editor and two anonymous referees.