The Two Institutional Logics: Exit-Oriented Versus Commitment-Oriented Institutional Designs

Abstract

Throughout mathematics, science, engineering, and human affairs, there are two logics that are dual to one another (series-parallel duality). Albert Hirschman investigates the two logics as the parallel-oriented logic of exit and the series-oriented logic of commitment, loyalty, and voice. Economics focuses almost exclusively on the logic of exit so that all questions of institutional design are seen through that lens. Exit-oriented designs are the one size that fits all economic problems - the One Best Way. One goal here is simply to flesh out the alternative commitment-oriented logic of institutional design. The large Japanese-style firm is a major example of the commitment-oriented design in an organization. Another thesis is that each logic has an internal consistency so some mix and match hybrids can be more lethal than vigorous. In the East Asian crisis, highly leveraged firms from a commitment-oriented system of relational finance had taken advantage of the new funds available from globalized financiers operating under the exit-oriented logic of arms-length finance - and the hybrid proved to be unviable. Overall, my goal is to illustrate the two institutional logics that offer two different and often incompatible ways to approach questions of flexibility, performance, and efficiency.