Organizational Democracy

Abstract

In this paper, we propose an economic model to analyze the democratization of organizations. We justify several popular forms of democratization by economic efficiency. We find that ordinary members are always better off when their organization is more democratic. Even under the majority rule, the minority is better off. As long as ordinary members’ bargaining power is small, the authority is also better off in a more democratic organization, implying a Pareto improvement. In general, for a linear social welfare function, a democratic organization is socially better if ordinary members’ bargaining power is small. Surprisingly, however, income inequality is exacerbated in a more democratic organization, although welfare inequality is reduced between the authority and ordinary members.

Keywords: dictatorial system, majority system, committee system, consensus system, investment, income, welfare

JEL Classification: P16, L2