Valuing Exit Options

24 Pages Posted: 20 Feb 2007

See all articles by Jenna Bednar

Jenna Bednar

University of Michigan at Ann Arbor - Department of Political Science

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Abstract

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 {\it 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.

Keywords: Federalism, secession, constitutional design

JEL Classification: D7, H49, H77

Suggested Citation

Bednar, Jenna, Valuing Exit Options. Publius: The Journal of Federalism, Vol. 37, No. 2, 2007, Available at SSRN: https://ssrn.com/abstract=963473

Jenna Bednar (Contact Author)

University of Michigan at Ann Arbor - Department of Political Science ( email )

Ann Arbor, MI 48109
United States
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