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

We study a continuous-time organization design problem. Each member's output is an imperfect signal of his underlying choice of effort, and each member's utility from remaining in the organization is endogenous to the output of other agents. Monetary transfers are assumed infeasible. Incentives can be provided only through two potential channels: removal due to poor performance (the stick) and rewarding good performance by allowing a "vacation" or respite (the carrot). We derive the steady-state distribution of continuation utilities of agents in the organization and show that both the stick and the carrot are used to provide incentives under an optimal design. Moreover, the optimal organization may be implemented by associating continuation utilities with a reputation system that tracks each member's performance over time.