Fear of exclusion: the dynamics of club formation

Abstract This paper explores a dynamic model of sequential club formation in which identical individuals join or leave clubs over time and their preferences depend solely on the number of members in the club. There exists a unique optimal-sized club which maximises per-period payoff of each individual. To study the implications of the dynamic setting, we use a benchmark game of a finite number of periods which mimics the static framework. Implied by the dynamic nature of the problem, we find a new source of inefficiency that is caused by so called fear of exclusion phenomenon where individuals fear being excluded from a relatively superior sustainable club, which is not necessarily optimal. An unusual behaviour may be observed in which individuals strictly prefer to form sub-optimal sized clubs. A specific class of equilibria is analysed to examine such behaviour.