Economic Theory

, Volume 35, Issue 1, pp 73–97 | Cite as

The good, the bad and the ugly: agent behavior and efficiency in open and closed organizations

  • Duncan M. Holthausen
  • Theofanis TsoulouhasEmail author
Research Article


Current literature has largely ignored the fact that some organizations are highly selective when admitting new agents while others are more open. In addition, some organizations audit or sort agent behavior within the organization more aggressively than others. One might expect a priori that closed, highly selective, organizations would always be more efficient because they screen out the worst types, which could lead to better agent behavior. We show that this is not the case. Specifically, when agent behavior in equilibrium is uniform across organizations (i.e., when the number of agents behaving the same way is identical), closed organizations are inefficient. However, when agent behavior varies across organizations, closed organizations may or may not be inefficient, depending on net payoffs to the organization and the agents. Our analysis implies that organizations should choose the open type when screening or sorting costs are high, when there is a high frequency of good agent types in the population, when agent misbehavior does not reduce output significantly, and when penalties for misbehavior are large.


Asymmetric information Organization theory Efficiency Sorting Screening 

JEL Classification Numbers

D82 L22 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Cross, K.: The Weakest Links. Business 2.0 (2001)Google Scholar
  2. Harrington J.E. (1998) The social selection of flexible and rigid agents. Am Econ Rev 88(1): 63–82Google Scholar
  3. Kahlil F. (1997) Auditing without commitment. RAND J Econ 28(4): 629–640CrossRefGoogle Scholar
  4. Levin J., Tadelis S. (2005) Profit sharing and the role of professional partnerships. Q J Econ 120(1): 131–171CrossRefGoogle Scholar
  5. Maskin E., Tirole J. (2004) The politician and the judge: accountability in government. Am Econ Rev 94(4): 1034–1054CrossRefGoogle Scholar
  6. Shapiro C., Stiglitz J. (1984) Equilibrium unemployment as a worker discipline device. Am Econ Rev 74(3): 433–444Google Scholar

Copyright information

© Springer-Verlag 2007

Authors and Affiliations

  1. 1.Department of EconomicsNorth Carolina State UniversityRaleighUSA

Personalised recommendations