The two institutional logics: exit-oriented versus commitment-oriented institutional designs

Abstract

Throughout human affairs there are two dual logics. Albert Hirschman investigated 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 and questions of institutional design are seen through that lens. One goal here is to flesh out the alternative commitment-oriented logic of institutional design. The large Japanese-style firm is a major example of the commitment-oriented institutional design. Another point 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.