Efficient Institutions: The Role of Exit and Voice☆

Hirschman has repeatedly stated that Voice is better than Exit as citizens or clients response to dissatisfaction with the service provided by organizations of various nature. He also maintained that all too often Exit was preferred to Voice and the negative result would be that services of worse quality will be supplied in the system as a whole. Unfortunately, Hirschman never formalized his powerful categories and his fascinating ideas. The paper is an attempt to fill this gap; it also aims at showing how helpful Hirschaman’s approach can be in the endeavour to design efficient institutions. This paper provides a definition of efficiency convenient for our purposes and presents a model where both Exit and Voice can be necessary in order to achieve efficient results, given that the decline of organizations can have several different originating factors. Then it identifies the analytical conditions under which Exit is spontaneously chosen by citizens or clients despite being less efficient than Voice. The paper shows that the use of Exit when Voice would be more efficient is not as general as Hirschman seemed to imply but it can arise under well-specified circumstances. In its final part, the paper suggests how institutions should be designed in order to prevent such inefficient results.