Competition among Clubs: Do the Best Join the Best?

This paper analyzes the competition among clubs in which the status of club members is the crucial added value accruing to fellow club members through social interaction within the club (e.g. in professional sports clubs, academic faculties, country clubs, or internet communities). In the course of competition for new members, clubs trade off the effect of entry on average status of the club and candidates’ monetary payment via an entrance fee. We show that competition for new members with different status levels leads to a perpetuation of differences in average status levels among the clubs: the best candidates join the best clubs. In addition, we show that potential new candidates with low status levels either cannot enter any club at all or are completely exploited. On the other hand, competition among clubs protects candidates with high status, allowing them to appropriate some of the surplus accruing from entry. We distinguish among various decision rules and organizational set-ups, including majority voting, unanimity, and meritocracy. We find that, from a welfare perspective, the unanimity rule leads to inefficient exclusion of some candidates, while meritocracy leads to inefficient inclusion. Majority voting can accomplish the second-best result under certain assumptions.