Sunday, March 9, 2014

A Definition of "Coasian Bargaining" I Can Live With

I'm currently reading Jack Knight and James Johnson's excellent book, The Priority of Democracy: Political Consequences of Pragmatism (Princeton 2011). I confess to some skepticism when I saw that, in Chapter 3 on "The Appeal of Decentralization," they included a section on "Coasian Bargaining." However, they are the first authors to define that term, if only implicitly, in a way I found at all useful: a "Coasian bargain" is a bargain that occurs in the world of the "Coase theorem" to move entitlements to more highly valued uses. In contrast to most definition of "Coasian bargaining," Knight and Johnson's has the twin advantages of (a) successfully distinguishing "Coasian bargaining" from simple "bargaining," as simple bargaining in the real world always takes place in the presence of transaction costs and (b) avoiding the pernicious implication that "Coasian bargains" imply that the "Coase theorem" has any empirical relevance, that is, that it has anything to tell us about real world allocations of entitlements.

I'm not convinced that the authors get the normative implications of Coase's work quite right. They parrot Posner's misleading interpretation of Coase that the key to maximizing the social product is to structure institutions so as to minimize transaction costs. There is some truth in that normative takeaway from Coase, but it is not the whole truth because, in contrast to Posner's interpretation, Coase was quite clear that we could never even approximate the world of the "Coase theorem," which was simply Coase's restatement of the standard neoclassical assumptions, according to which institutions, including legal rules allocating entitlements to resources, are irrelevant to ultimate economic outcomes.

Nevertheless, if scholars would, following Knight and Johnson, consistently use the phrase "Coasian bargaining" to mean only the bargains that would occur in the mythical world of the "Coase theorem," I would not object to the term. The problem is, many scholars use the phrase to describe deals made in the real world of positive transaction costs to avoid or resolve disputes over entitlements. Such uses fail, in my view, to distinguish "Coasian bargains" from bargains simpliciter. All bargains in the real world of positive transaction costs either avert or resolve potential or actual conflicts over entitlements. Thus, all bargains are "Coasian bargains." So, "Coasian bargains" = bargains, and the modifier "Coasian" adds nothing.

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