Wednesday, August 19, 2009

Albert O. Hirschman, Exit, Voice, and Loyalty: Chapter 4, "A Special Difficulty in Combining Exit and Voice"

In some cases, ease of exit entrenches poor quality . Institutions that are relatively impervious to the effects of exit (nationalized Nigerian railway, public schools, corporate management with respect to stockholders are given as examples) are less likely to restore quality if their most active and resourceful customers leave, because these are the customers who could most effectively exercise voice.

Hirschman makes an analysis of exit as a function of consumer surplus. Consumers with a large surplus -- those for whom the product actually holds much greater value than the market price -- exit most quickly when quality declines. A price increase has the opposite result -- consumers with a small surplus are the first to exit.

Hirschman identifies consumers who have a large surplus with those most concerned with quality, and also with consumers who can most effectively exercise voice, or at least have the most to gain by doing so. (This is key to the analysis of the result of a decline in quality).

Consumers concerned with quality will be most willing to exit when better quality (although probably more expensive ) good is available. Price-sensitive consumers will be most willing to exit when a cheaper (although lower quality) good is available. As a result, quality-conscious consumers will be quit to exit in response to deterioration when a better, albeit more expensive, good is available but slow to exit when inferior, although cheaper, goods are available.

Since quality conscious consumers are most likely to exercise voice, this has an important impact on a large class of "quality of life" public services which depend heavily on voice for the maintenance of quality: the gap in the quality of these services between the high and low end will tend to increase. This is especially true in societies with a high level of social mobility. Where exit upward to superior service regimes is restricted, however, consumers have more at stake in improving the quality of their existing services, and the gap will not grow as wide.

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