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The Coase Theorem, the Nonempty Core, and the Legal Neutrality Principle

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  • Crettez Bertrand

    (Department of Economics, University Panthéon-Assas Paris II, 12, place du Panthéon, Paris, 75005, France)

Abstract

The Coase theorem states that where there are externalities and no transaction costs resource allocation is Pareto-optimal and independent of the stakeholders’ legal position. This result has been challenged many times. In the cooperative game approach to resource allocation, the refutation is made by constructing a three-person game which has an empty core under one set of liability rules—which implies that optimal allocations are coalitionally unstable–and a nonempty core under another set. In this example, however, the probability that the core is non-empty is rather high (5/6). Yet, even if coalitionally stable Pareto-optimal arrangements are likely, to establish the plain validity of the Coase theorem it must be shown that the legal neutrality statement also holds. We show that for the three-person cooperative game example mentioned above, the probability that the two assertions of the Coase theorem hold can be as low as 3/8.

Suggested Citation

  • Crettez Bertrand, 2020. "The Coase Theorem, the Nonempty Core, and the Legal Neutrality Principle," Review of Law & Economics, De Gruyter, vol. 16(1), pages 1-16, March.
    • Handle: RePEc:bpj:rlecon:v:16:y:2020:i:1:p:16:n:2
    DOI: 10.1515/rle-2018-0027
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    References listed on IDEAS

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    1. Benoit, Jean-Pierre & Kornhauser, Lewis A., 2002. "Game-theoretic analysis of legal rules and institutions," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 3, chapter 60, pages 2229-2269, Elsevier.
    2. Bernholz, Peter, 1997. "Property rights, contracts, cyclical social preferences and the Coase theorem: A synthesis," European Journal of Political Economy, Elsevier, vol. 13(3), pages 419-442, September.
    3. Coase, R H, 1981. "The Coase Theorem and the Empty Core: A Comment," Journal of Law and Economics, University of Chicago Press, vol. 24(1), pages 183-187, April.
    4. Aivazian, Varouj A & Callen, Jeffrey L, 1981. "The Coase Theorem and the Empty Core," Journal of Law and Economics, University of Chicago Press, vol. 24(1), pages 175-181, April.
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    6. Hurwicz, Leonid, 1995. "What is the Coase Theorem?," Japan and the World Economy, Elsevier, vol. 7(1), pages 49-74, May.
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    More about this item

    Keywords

    Coase theorem; cooperative games; core; legal neutrality;
    All these keywords.

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • K0 - Law and Economics - - General

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