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Can Coasean bargaining justify Pigouvian taxation?

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Author Info
Stephanie Rosenkranz
Patrick W. Schmitz

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Abstract

The fact that according to the celebrated Coase Theorem rational parties always try to exploit all gains from trade is usually taken as an argument against the necessity of government intervention through Pigouvian taxation in order to correct externalities. However, we show that the hold-up problem, which occurs if non-verifiable investments have external effects and parties cannot be prevented from always exploiting ex post gains from trade through Coasean bargaining, may be solved by government intervention. In this sense, the impossibility to rule out Coasean bargaining (after investments are sunk) may in fact justify Pigouvian taxation.

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Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse7_2006.

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Length: 24
Date of creation: Feb 2006
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Handle: RePEc:bon:bonedp:bgse7_2006

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 9221
Web page: http://www.bgse.uni-bonn.de/index.php?id=494

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Related research
Keywords: Hold-up problem Bargaining Contracts Taxation Externalities

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Find related papers by JEL classification:
D62 - Microeconomics - - Welfare Economics - - - Externalities
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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References listed on IDEAS
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    Other versions:
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    Other versions:
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  18. Bensaid, Bernard & Gary-Bobo, Robert J, 1993. "Commitment Value of Contracts under Renegotiation Constraints," Econometrica, Econometric Society, vol. 61(6), pages 1423-29, November. [Downloadable!] (restricted)
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