Voice, Exit, and Managed Decline

In the real world, the Tiebout model operates slowly.
September 11, 2013 • Commentary
This article appeared on The Umlaut on September 11, 2013.

The recent, thoroughly ill‐​advised Slate piece on the immorality of those who send their children to private schools has the merit of reminding one of the importance of issues of voice and exit and raising the question of how effective exit is in shaping public policy. Albert Hirschman’s distinction between exit and voice as two ways of addressing problems in organizations is probably one the most important ideas in the social sciences.

When individuals within organizations have grievances, they typically face a choice between voice and exit. One does not try to set up an appointment with the CEO of Starbucks if one believes that their coffee is overroasted (a friend of mine holds that view), one simply takes one’s business elsewhere. Conversely, few people would seek a divorce because their spouse can’t make bisque—in a marriage, voice is generally a more sensible way of resolving problems. In short, the choice between the use of voice and exit will likely depend on factors like transaction costs, the severity of collective action problems that are involved, asset specificity, and so on.

Governments sit awkwardly between these polar extremes, as people use both voice and exit in different contexts. Public choice economics suggests that the traditional exercise of voice in a democratic society—i.e., once in four or five years, at the ballot box—is pretty much useless. In many ways, exit can get people what they want much more effectively.

Parents move to a better school district or send their children to private schools; similarly, high‐​skilled workers and investors move to jurisdictions with friendlier tax or regulatory regimes, such as Dubai or Singapore. Clearly, exit has become much easier than it once was. Capital is more mobile (p.5), and new technologies and cheap travel make it easier for people to move countries or continents without jeopardizing their social ties and friendships.

While exit is clearly good for people and entrepreneurs who are able to move, how effective is it in improving policies? The original Tiebout model assumed that with many jurisdictions to choose from, and with perfectly mobile and well‐​informed consumers, different communities will accommodate people’s preferences over government‐​provided goods and tax rates. Even without the idealized assumptions driving Tiebout’s result, models of tax competition have depicted governments as actively competing for mobile taxable bases, resulting in the widely maligned ‘race to the bottom’.

Given that the world falls short of the assumptions of these models, how much evidence is there that policies in the West have improved dramatically as the costs of exit have fallen over past twenty years or so? In the United States, marginal income tax rates are roughly where they were in 1990 (p. 43). In France, President Hollande is responding to the exodus of the best and brightest with a 75‐​percent tax rate imposed on income. Since the deregulations of the late 1970s, the regulatory burden seems to be growing constantly in the United States. Even on margins that are directly relevant to locational choices of, say, high‐​skilled individuals, governments of countries like the US or the UK do not come across as being consciously involved in a competitive bidding for the pool of world’s talent.

Governments fall short of being the eager competitive maximizers who would react to the outflow of capital and talent to friendlier jurisdictions. Because of political failures or institutional sclerosis—or maybe because exit costs are just not low enough—many governments see their workforce and capital leave, yet with very little impact on their policies.

Instead of hoping that the mobile and exit‐​driven world of tomorrow will behave as a competitive marketplace where governments try to attract talent and capital, we may expect the emergence of two tiers of countries. On the one hand, there will be the flexible, responsive jurisdictions—the Singapores and the Switzerlands of the world—where policymakers will “get it” and will actively engage to attract global economic elites and their funds. And, unless something significant changes in the way our democracies operate, we may also see a lot of managed economic decline in the once‐​wealthy economies of the West.

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