Communities, Co-Ops, and Clubs: Social Capital and Incentives in Large Collective Organizations

American Economic Journal: Microeconomics, 2021

We study a continuous-time organization design problem. Each member’s output is an imperfect signal of his underlying effort, and each member’s utility from remaining in the organization is endogenous to other members’ efforts. Monetary transfers are assumed infeasible. Incentives can be provided only through two channels: expulsion following poor performance (the stick) and “vacation” or respite following good performance (the carrot). We derive the steady state distribution of members’ continuation utilities for general parameter values and then optimize these values according to organizational objectives. An optimally designed organization can be implemented by associating continuation utilities with a performance-tracking reputation system.

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