“A Theory of Organizational Dynamics: Internal Politics and Efficiency” by Hongbin CAI
In this paper, we develop a stylized model to study how internal politics affects an organization’s hiring of new members and investigate the implications of the dynamic interactions between internal politics and hiring of new members on the organization’s long run outcomes and welfare. We consider an organization with a fixed size in which one of the incumbent members retires in each period and the incumbent members vote to admit a candidate to fill the vacancy. Agents differ by quality that is valued equally by every member in the organization. In addition, each agent belongs to one of the two types, where members of the majority type in any period control the rent distribution of the organization and share the total rent of that period among themselves. We characterize the conditions for a Markov equilibrium of the dynamic game, and the long run equilibrium outcome and welfare. Then we solve the model of a three member club with uniformly distributed quality, under both majority and unanimity voting rule in admitting new members. Among other things, we find that “some politics can be a good thing if it is done right”, in that under certain conditions the club achieves greater total welfare in the long run in the presence of internal politics than when internal politics is irrelevant, if unanimity voting rule is used to admit new members. Moreover, “too much politics is surely a bad thing” in that the club obtains low long run welfare when politics becomes very intense. In such a case, majority voting is better than unanimity voting because the club can lose more welfare from politics under unanimity voting.