A Formal Model of Exit and Voice

I re-examine Hirschman's classic text Exit, Voice, and Loyalty through a game-theoretic interpretation of the relationship between exit and voice. The model, which is general and applicable to diverse environments, treats exit as a costly decision, which may be prevented through an appropriate choice of policy by the leadership of an organization. Voice – the capacity of an organization's members to participate in the setting of policy – is similarly costly, but provides a share of the surplus from avoiding exit. The formalization sheds light on the static and dynamic effects of exit, the conditions for the development of voice, the impact of loyalty, and the decision of organizational leaders to suppress voice and exit. I illustrate the model by revisiting Hirschman's analysis of exit and voice in the collapse of East German communism.