2005, Clark et al 2006) by improving the threat point or bargaining position. In analyses of
decentralized systems, exit options lead to subnational gains because the subnational gov-
ernment is able to extract a greater distributional allocation from the center (Triesman 1999,
De Figueiredo and Weingast 2005). In general, the better the outside option, the better off
the government. That is, exit options improve utility.
A contrasting view builds on Schelling’s (1960) insights about the value of commitment
to makes threats credible.
Many solutions to collective action problems require a joint
commitment to punish, which becomes a collective action dilemma of its own (Axelrod 1986;
Greif, Milgrom, and Weingast 1994). Despite vows to react punitively, if called upon to
do so, an agent prefers not to punish if the punishment is costly. Unless an agent can
precommit to follow through, a threat has no deterrent effect on others capable of foresight.
Relatedly, Elster (1979/1984) invokes the image of Ulysses binding himself to his ship’s mast
to resist the sirens’ temptations; by eliminating future options, precommitment mechanisms
can overcome the problems that are introduced by changing preferences (for example, due
to addiction or an altered state of mind).
In this paper I bring the cautions of the second literature to bear on the study of exit
options. If federalism is portrayed as a distributional challenge—the allocation of divisible
goods between member governments—then the application of Hirschman and related insights
is fitting. But if we consider federalism to be a problem of compliance because its productivity
(including the generation of divisible goods) is dependent upon the willingness of governments
to punish one another, then exit options have a second effect that may trump the first,
imperiling even a mutually beneficial union. This paper will show that it is not sufficient for
the value of the union to exceed the value of exiting for a state to prefer federal membership to
independence. Or, more precisely, we need to specify the value of the union more particularly
than expected return when all member governments comply. At the moment of punishment,
a member state may choose to exit rather than incur costly punishment. Therefore the extent
of punishment possible must take exit options into account. The result is that punishments
are minimized. But with less severe punishment, high compliance cannot be maintained.
2
Convention