Making exit costly but efficient: the political economy of exit clauses and secession

Abstract

This article presents a political economic analysis of exit from federations. After the federation has formed, members’ benefits from it may be different than expected. If a member ends up not benefitting, it may wish to secede i.e. exit the federation. Based on formal models, we show how state-contingent exit penalties can induce socially efficient exit decisions: they force the secessionist member to take into account the lost benefits of the federation for the other. Even if ex-ante specified exit penalties cannot be made state-contingent, they may still enhance social welfare by preventing forceful exit. Empirical evidence concerning Montenegro, Saint Kitts and Nevis, and the EU is compatible with these claims. In spite of the simplifications inherent to any modeling exercise, we hope that our results stimulate more research into exit clauses as a means to mitigate the problem of violent secessionism.