Heterogeneity, Vetoes and Exit Clauses in Federal Systems

When setting constitutional rules, the future members of a (quasi-)federal system such as the European Union presumably think ahead. This article develops and tests a game-theoretical model of their choice of whether to adopt an exit right. Without a legislative veto, heterogeneous members may fear the adoption of policies that would cause them to stop benefiting from the prospective federation. Anticipating this, they may require an exit right in order to join. If federalization happens through decentralization or annexation, this conclusion does not hold. The model can explain the adoption of an exit right at the European Convention ahead of the 2004 Eastern enlargement. A probit regression on the positions 94 Convention delegates, based on newly coded data, provides statistical evidence that heterogeneity drives support for an exit right. The article concludes with a case study of Saint Kitts & Nevis and a model of the Brexit referendum.