Literature on bargaining within international organizations points to two potential sources of bargaining power: veto rights and exit rights. In some circumstances a member state may be able to veto a rules change which it opposes. In others, it may be able to threaten to leave the organization if its demands are not met. Finally, if exit from the organization is possible, other member states may be able to force a laggard member state to accept changes it opposes by threatening to kick the laggard out of the organization if the state does not agree to the proposed change. Under what circumstances do veto rights provide bargaining leverage and under what circumstances are exit threats a source of power? When would a member state prefer to use one of these sources of power over the other? Are both of these options available simultaneously or if one is available does that mean that the other is not? What implications does this have for political integration, and more broadly, the possible creation of a federal state? This paper seeks to answer these questions using a game theoretic model to examine the interaction between veto rights and exit threats in international organizations and federal states. My model has implications for European integration and can also help explain the conditions under which independent states give up sovereignty to form a stable federal union. I test the implications of the model through a case study of EU integration in the 1970s and 1980s
