Cheap talk with an exit option: a model of exit and voice.

The paper presents a formal model of the exit and voice framework proposed by Hirschman (Exit, voice, and loyalty: responses to decline in firms, organizations, and states. Harvard University Press, Cambridge, 1970). More specifically, we modify Crawford and Sobel's (Econometrica 50(6):1431-1451, 1982) cheap talk model such that the sender of a cheap talk message has an exit option. We demonstrate that the presence of the exit option may increase the informativeness of cheap talk and improve welfare if the exit option is relatively attractive to the sender and relatively unattractive to the receiver. Moreover, it is verified that perfect information transmission can be approximated in the limit. The results suggest that the exit reinforces the voice in that the credibility of exit increases the informativeness of the voice. [ABSTRACT FROM AUTHOR]