Internal hierarchy and stable coalition structures

When an agent decides whether to join or not a coalition, she must consider (1) the expected power of such a coalition as well as (2) her or her position in the vertical structure within the coalition, be it a firm, a party, or a gang. We establish that there exists a positive relationship between the degree of inequality in remuneration across ranks and the number of coalitions to be formed. Moreover, we show that in all stable systems the endogenous coalitions must be mixed and balanced in terms of members’ abilities, with no segregation. (JEL Codes: C71, D71)