Implications of Club Theory

IEIs are clubs in the sense that they produce goods that are at least partially non-rivalrous (more than one user can consume them) and at least partially excludable (users can be denied access to them). Their most important services include order and predictability in international commerce and finance. Although these services are generally enjoyed by countries without diminishing their value to others, IEIs also offer services specifically to members that generate demand for membership.

Club theory⁴ has been widely used in economics and political science, including in the analysis of international organizations (Ruggie 1972; Fratianni and Pattison 1982, 2001; Kahler and Lake 2003; Keohane and Nye 2003; Lawrence 2008). We focus on three major insights. First, the provision of club goods fills an important gap: clubs can lead to Pareto-optimal results by supplying public goods under optimizing conditions that are similar to those in market production. Second, the expansion of club membership tends to make clubs less effective: decisions are harder to align as the preferences of members diverge. Third, clubs tend to be relatively inflexible institutions: club charters are usually designed to maintain firm control in the hands of founding members and those who share their preferences.

2.1 Provision

Because clubs overcome free-rider problems by sharing costs, they produce services (and hence consumer surplus) that cannot be generated in markets. If a club maximizes the benefits of its members, it can be shown to bring the marginal rate of substitution between the services it provides and normal goods into equality with the marginal rate of transformation among them. Thus, the welfare implications of club decisions are similar to those of market decisions under competition: the relative prices of club goods, as other goods, equal their relative marginal costs of production. Since they operate in the global arena, IEIs offer services that are especially unlikely to be produced by markets and their contribution to welfare is potentially very large. But the extent to which they “fill the space” of required public goods may be limited. As discussed below, IEIs, unlike smaller government organizations such as municipalities, are less likely to face competitive pressures that lead to efficient production decisions.

2.2 Membership

Clubs set criteria for admission and may limit membership. Analytically, they can be expected to equate the net benefit of adding a member to the costs imposed on existing members. Since many international public goods are non-rivalrous, IEIs have little reason to limit membership from the production viewpoint, but adding members does increase costs in decision making. Political pressures for inclusion have nevertheless led to steady and substantial growth in the membership of the “big three.”⁵

Expansion tends to increase the heterogeneity of membership. This usually implies demand for a wider range of services and also, as Fratianni and Pattison (2001) point out, increases decision-making costs. Since a member's welfare depends on the extent to which the club addresses its preferences, its welfare may be lowered if the club becomes more diverse and begins to produce (from the member's viewpoint) the wrong services. These effects may be especially costly to existing members if the club has an inclusive decision-making structure. For example, if decisions are made by consensus, then each new member gets an effective veto. Expansion has created problems in all three major IEIs, and especially in the WTO, which is governed by consensus rather than by qualified voting.

2.3 Club Dynamics

Clubs are usually analyzed in a static context, under the implicit assumption that provision and membership are decided once and for all. But international institutions exist for long periods of time, and during this time their membership and external environment are likely to change. The extent to which clubs adapt to changing environments thus becomes increasingly important to their operations over time.

When a new club is created, members have common interests and design services to meet their common needs. (In the simplest club models, decision making is not even considered, since any member is assumed to be representative and thus able to make decisions for a club.) This may be a reasonable approximation of the environment of the Bretton Woods era, when the United States (US), United Kingdom, and France made essentially all major decisions and awarded themselves a majority of the voting shares of global institutions, but is clearly not applicable today.

The founders of clubs recognize that over time their interests could diverge as other members are added and/or their relative power or external environment changes. To make sure that their investments and contributions are nevertheless protected, founders usually adopt rules that limit changes in club policies and vest control in themselves and others who are likely to share their interests. Club charters do this by limiting changes in:

• membership, by setting admission criteria to ensure the alignment of the interests of new members with those of old ones;
• the range of services provided, by requiring supermajority votes on policy changes; and
• the charter itself, by requiring supermajority votes for rule changes.

Charters thus make it difficult for clubs to change the types of services they offer, to admit “different” members, or to reform governance.

As a result of such rules, clubs are less adaptable than firms. A firm is responsible to shareholders in financial terms and is charged with adjusting its products and services to new commercial opportunities. By contrast, as long as a club remains in business, it will continue to produce only those services that benefit its controlling members, even if its assets could be more productively deployed to other services that address non-controlling members or non-member communities. Even if clubs initially satisfy optimality conditions similar to those of firms in markets, they will not do so as they age and, over time, the club's production structure will diverge from that of a profit-maximizing firm.⁶ Because clubs tend to be long-lived,⁷ they face increasing efficiency losses as their members' preferences diverge and environments change. Meanwhile, their governance becomes more contentious and less decisive.

2.4 Competition and Adaptation

Despite these rigidities, clubs may produce an optimum array of public goods if certain conditions hold. An interesting analysis of clubs takes particular advantage of their rigidities to argue that efficiencies can emerge from competition among clubs. Tiebout (1956) assumes that different political communities offer stable portfolios of services and use those to compete for members. (The stability of services presumably reflects constraints in municipal charters.) System-wide efficiency is achieved if the number of municipalities exceeds the variety of preferences to be accommodated and each required services can be produced on a reasonable scale. People then sort themselves into homogeneous communities, each of which optimizes the provision of public goods consistent with their preferences. Unfortunately, some public goods have to be produced on a scale that does not permit such competition. This is especially so for international public goods, such as a system of global rules to govern trade.

Clubs not only resist change, but also “take up space” and impede the development of new clubs in their areas of operation. If a new club can become viable only by recruiting the members of an existing club, then existing clubs may prevent the new club from forming, even if the latter would generate greater benefits.⁸ Clubs do this by making it just worthwhile for their marginal member to stay, thus depriving new clubs of the contributions of members of existing clubs.

Thus, competition does not help to overcome the rigidity of international clubs, as it might in the case of smaller governing units. Conventional reforms—say, adjustments in voting shares—will not help either, since, at best, they align decisions better with a club's (changing) median member. We argue that reforms are also needed to facilitate flexible decision making within clubs (or in allied institutions) in order to make them adaptable and effective.

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