Pricing group membership

We consider a model where agents differ in their `types' which determines their contribution towards a club good (i.e public good within a group). We analyze what the equilibrium composition of groups are under mandated and voluntary choice. We show that there exists a top-down sorting equilibrium i.e. an equilibrium where there exists a set of prices which leads to groups that can be ordered by sets of types, with the highest types in the group paying the highest price and so on. This exists both under mandated and voluntary choosing. We also analyze the model with endogenous group size and examine under what conditions is top-down sorting socially efficient. We illustrate when integration (i.e. mixing types so that each group's average type is the same) is socially better than top-down sorting.

Pricing group membership Articles