Valuing Exit Options
نویسنده
چکیده
This paper examines an important aspect of federalism: the effect of a secession threat on the union’s productivity. Productivity requires a compliance maintenance regime with credible punishment. An exit option gives a government the alternative of opting out of the union rather than suffer the disutility of a punishment. Equilibria are characterized over a continuous range of exit option values. The results indicate that only exit options that are superior to union membership improve utility; those of moderate value decrease net and individual government utility due to their harmful effect on compliance maintenance. A prescription that emerges from these results is that if the exit option is inferior to the benefit from a thriving union, member governments should voluntarily submit to measures that make exit as costly as possible. In federalism we observe no perfectly harmonious unions; instead, even the most stable—the United States since 1865, Switzerland—are characterized by near-constant quibbling and, periodically, more serious disputes. Others, such as Canada, seem to be perennially at the brink of rupture. An emerging body of work studies the institutional design supporting effective federations (Filippov, Ordeshook, Shvetsova 2004; Volden 2005; de Figueiredo and Weingast 2005; Bednar 2007). In this paper I take up a special aspect of federalism’s problem: the effect of an exit option on the productivity of the union and the utility of the governmental members. ∗I am grateful to audience members at the 2006 Midwest Political Science Association Meetings and the 2006 American Political Science Association Meetings. I also thank, without implicating, my discussants at these conferences: Ken Kollman, Burt Monroe, and especially John Londregan. Finally, two terrific referees and Craig Volden provided useful comments to improve the article.
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