Allocating Durable Goods Through a First-Come Rule or Through Individual Ownership

This article investigates the role played by bargaining and communication costs in determining the choice between two different institutions. The institutions or mechanisms are individual ownership and the first-come-first-serve rule. These are seen as alternative mechanisms by which to allocate durable goods over time. Individual ownership is essentially dictatorial, giving the owner of a good the exclusive right to use the good. The first-come-first-serve allocation rule, often used under collective ownership, allocates the good in a given period to the person who first obtains the good in that period. The claim is that the choice between these two mechanisms is mainly determined by the attempt to secure allocative efficiency while minimizing bargaining and communication costs. Individual ownership is not always efficient since it involves the cost for non-owners of asking permission of the owner when they wish to use the asset(s). In a simple model with one good and two agents, A and B, it is analyzed for which utility functions and for which level of bargaining costs, the good should be owned by A, by B or by the two collectively using the first-come rule. The model is then extended to cover the case of two goods analyzing when two goods should be owned by one of the agents (integration), by the two agents together (partnership) or by the two agents separately (independence). The model with one good provides an explanation of the widespread use of collective ownership in developed as well as undeveloped economies. The model with two goods points towards a formalization of the Coasian idea that bargaining costs play a central role in determining the size of firms.