The role of exit costs in the theory of cooperative teams: A theoretical perspective

Lin suggests that exit rights are necessary for the existence of efficient self-enforcing contracts. This view has recently been criticized by Dong and Dow and Putterman and Skillman who argue precisely the opposite, namely that exit costs are necessary for the existence of self-enforcing contracts, as originally shown in MacLeod. First I reiterate some points made in MacLeod that imply the Chinese cooperatives would have been a failure regardless of the level of exit costs. Second, the kinds of exit costs needed for the existence of self-enforcing contracts are essentially voluntary and would never take the form of forced collectivization as observed in China. In the context of the Chinese experiment, exit rights would most probably have averted a disaster because peasants would have had the choice of not joining an organization they believed to be inefficient. In the final section, I discuss the use of game theoretic models to address organizational issues and make some suggestions for future research directions.