The Core, Transaction Costs, and the Coase Theorem

This paper clarifies and synthesizes elements of the two decade old debate concerning the Coase theorem and the empty core. Five lessons can be derived from this debate: 1. The Coase theorem may break down when there more than two participants (provided the additional participants bring an additiona...

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Bibliographic Details
Published in:Constitutional political economy 2003-12, Vol.14 (4), p.287-299
Main Authors: Callen, Jeffrey, Aivazian, Varouj Aram
Format: Article
Language:English
Subjects:
Bargaining
Contract negotiations
Contracts
Economic models
Economic theory
Economics
Efficiency
Environmental policy
Externalities
Externality
Free riding
Game Theory
Liability
Negotiation
Political economy
Political science
Pollution
Property rights
Public good
Rational Choice
Studies
Theoretical Problems
Transaction costs
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Summary:This paper clarifies and synthesizes elements of the two decade old debate concerning the Coase theorem and the empty core. Five lessons can be derived from this debate: 1. The Coase theorem may break down when there more than two participants (provided the additional participants bring an additional externality to the table). 2. The problem of the empty core does not disappear in a world of positive transaction costs. It is important to differentiate between transaction costs (when the core exists) and costs due to the empty core because each has different implications for rationalizing institutional arrangements. 3. The Coase theorem will not break down when the number of participants increases if the new participants do not bring additional externalities with them. If, however, additional participants bring in additional externalities, then the core may be empty and Pareto efficiency may not emerge from costless negotiations. 4. Pareto Optimality can be achieved when the core is empty by judicious use of penalty clauses, binding contracts, and constraints on the bargaining mechanism. 5. When a non-excludable public good is involved, a free-rider problem arises as the number of agents increases, and this undermines the Coase theorem; in this case, Coasean efficiency requires the participation of all agents affected by the externality in the writing of binding contracts.
ISSN:1043-4062
1572-9966
DOI:10.1023/B:COPE.0000003859.10184.f3