Friday, June 3, 2011

Is Every Avoided Lawsuit a "Win for Coase"?

Over at Environmental Economics blog (here), Tim Haab tells a nice story about neighbors who almost came to litigation over trees on one property that blocked views from another. Fortunately, cooler heads prevailed, and the parties settled out of court.

Less fortunately, Professor Haab suggests that this case might  somehow constitute "a win for Coase." It's not entirely clear what he means by this allusion to Coase. But here are a couple possibilities: (1) the case provides evidence that the so-called "Coase theorem" sometimes functions in the real world - something Coase himself maintains is impossible; or (2) the case is an example of "Coasean bargaining," an ill-defined concept sometimes used to suggest that the "Coase theorem" can function in the real world and other times used to suggest that parties can overcome positive transaction costs, in at least some circumstances, to attain a socially efficient allocation of entitlements to resources.

The problem with the first understanding of "Coasean bargaining" is, of course, that it reflects a misguided belief that a world of zero transaction costs ever can actually exist. The problem with the second understanding is its implication that all contracts and other agreements in the real world must constitute "Coasean bargains," in which case "Coasean bargains" equal bargaining simpliciter. Just what does the qualifier "Coasean" add to the label "bargain"? Is any and every Pareto-improving (or potential Pareto-improving) exchange a "win for Coase"? It's far from obvious to me that Coase deserves, or would want, credit for observing that contracting parties sometimes overcome transaction costs to achieve mutually beneficial exchange.

One more point: a successful settlement is no more (or less) evidence that Coase was right than a failed settlement that results in litigation. In the first case, parties overcome positive transaction costs to bargain for an allocation of entitlements. In the second case, they fail to overcome positive transaction costs to bargain for an allocation of entitlements. Arguably, the second case better illustrates Coase's most important claim that the  market mechanism is costly to use.

No comments:

Post a Comment

I actively moderate comments for spam, advertisements, and abusive or offensive language.