The Good, the Bad and the Ugly: Agent Behavior and Efficiency in Open and Closed Organizations

Duncan Holthausen () and Theofanis Tsoulouhas
Additional contact information
Duncan Holthausen: Department of Economics, North Carolina State University

No 1, Working Paper Series from North Carolina State University, Department of Economics

Abstract: This paper develops a novel model of agent behavior in organizations in order to compare the efficiency of “open” versus “closed” organizations. Closed organizations “screen” potential agents before admitting them while open organizations do not. Both have the option to “sort” (audit) individual behavior after observing aggregate outcome. Each agent is intrinsically “good,” “bad” or “ugly,” but can behave as any of the three types. Screening allows the organization to deny entry to the worst agent types, while sorting allows the organization to penalize opportunistic misbehavior by the agents. We show that both organizations may sort in equilibrium. When the sorting cost per agent is constant or exhibits economies of scale, surprisingly, both organizations sort the same number of agents, which leads agents of the same type to behave uniformly across organizations. However, agent behavior across intrinsic types may or may not be uniform. Interestingly, there is no equilibrium in which all agent types behave as good. When all agent types behave as bad or all behave as ugly, and an equilibrium exists in both organizations, closed organizations are less efficient from the organization’s perspective than open ones. When all agent types behave as ugly, closed organizations are socially inefficient as well. If agent behavior is a mixture of types, then closed organizations can be efficient because they screen out some of the worst agent types in advance. When organizations can precommit to a sorting frequency, more equilibria exist; for instance, all agent types may behave as good.

Keywords: organizations; agent behavior; organizational efficiency; screening; sorting; auditing (search for similar items in EconPapers)
JEL-codes: D23 D82 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2004-06, Revised 2004-09
New Economics Papers: this item is included in nep-bec
Note: First draft 2002-03
References: Add references at CitEc
Citations:

Downloads: (external link)
ftp://ftp.ncsu.edu/pub/ncsu/economics/RePEc/pdf/GoodBadAndUgly.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Failed to connect to FTP server ftp.ncsu.edu: A connection attempt failed because the connected party did not properly respond after a period of time, or established connection failed because connected host has failed to respond.

Related works:
Journal Article: The good, the bad and the ugly: agent behavior and efficiency in open and closed organizations (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ncs:wpaper:001

Access Statistics for this paper

More papers in Working Paper Series from North Carolina State University, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Theofanis Tsoulouhas ( this e-mail address is bad, please contact ).