Hedonic Independence and Taste-homogeneity of Organizations with Crowding Types

John Conley and Myrna Wooders

Annals of Economics and Statistics, 2004, issue 75-76, 197-219

Abstract: We consider a model of a local public goods economy with differentiated crowding that distinguishes between the tastes and crowding characteristics of agents. Crowding characteristics are those aspects of an agent that have a direct external effect on other members of the coalition to which he belongs. In such an economy, it is possible to form completely taste-homogeneous organizations while still taking advantage of the full array of possible crowding effects (labor complementarities, for example). We find, however, that it is nevertheless possible for taste-heterogeneous organizations to be strictly superior to taste-homogeneous organization with the same distribution of crowding types. We introduce a notion of hedonic independence, which stipulates that the values of an agent's characteristics (his taste type and his crowding type) are independent. We show that if hedonic independence is satisfied, then organizations in core and equilibrium states of the economy are essentially taste-homogeneous. A number of examples illustrate the application of our approach to several sorts of organizations. We conclude by discussing how hedonic independence might arise from market interactions.

Date: 2004
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