Saturday, November 28, 2009

Against "Coasian Bargaining," But Pro Coase and Pro Bargaining

When Peter Grossman and I revise Chapter 4 (on "'The Problem of Social Cost and Modern Law and Economics") of our Principles of Law & Economics textbook for the Second Edition (forthcoming Aspen/Kluwer 2011), I would like to incorporate some paragraphs on the phrase "Coasian bargaining," which appears with increasing frequency in the literature. In my view, it is a meaningless and potentially pernicious phrase, which Ronald Coase himself would almost certainly disavow.

When scholars use the phrase "Coasian bargaining," it is rarely clear just what they mean by it. Perhaps they mean many different things, but in the aggregate the phrase seems to refer to a subset of all bargains in which parties to some dispute or potential dispute over entitlements to resources manage to bargain their way to a socially efficient outcome.

But if that's all "Coasian bargaining" means, then the question arises: what distinguishes "Coasian bargaining" from bargaining simpliciter? I have never come across a satisfactory answer to this question. The difference cannot be based on the existence of transaction costs because, in the real world, transaction costs are ubiquitous; all bargaining (failed or successful) occurs in the presence of transaction costs. When those costs are high, bargaining is less likely to be successful, but may nevertheless succeed; when transaction costs are low, bargaining is more likely to be successful, but may nevertheless fail. In the absence of any analytically significant basis for distinguishing between bargaining and "Coasian bargaining," the addition of Coase's name seems inconsequential. "Coasian bargaining" = bargaining.

The phrase "Coasian bargaining" may also be pernicious to the extent that scholars might use it to assert or imply that the "Coase theorem" functions in the real world - something Coase himself has always vehemently denied. Coase articulated what George Stigler later labeled "the Coase theorem" to describe the world of neoclassical economic theory, which Coase sought to amend. The Coase theorem states that markets will always move goods to their highest and best uses, regardless of the initial allocation of entitlements (i.e., property rights) via voluntary contracting in the free market, if transaction costs are zero. The if is all important. As Coase has consistently pointed out, in the real world transaction costs are never zero; they are always positive and often quite high. Consequently, the initial allocation of entitlements - more broadly, the legal rules and social norms - can impede (or facilitate) allocative efficiency. If "Coasian bargaining" implies otherwise, it flies in the face of everything Coase has tried to teach us about the importance of property rights and legal rules for ultimate economic outcomes.

If it is ironic that Coase is best known for the "Coase theorem," which describes an unrealistic economic world view Coase sought to amend, it is equally ironic (not to mention wrong-headed) for scholars today to use the term "Coasian bargaining" in a vain effort to empirically validate the "Coase theorem."

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