Transaction Costs can Encourage Coasean Bargaining
AbstractWhen there are three parties, it is well known that the Coase Theorem may not hold even when there are no transaction costs, due to the emptiness of the core of the corresponding cooperative game [Aivazian and Callen (1981)]. We show that the standard Coasean bargaining game involving three parties is strategically equivalent to an asymmetric three player majority game. Hence, when there are three parties, the Coase Theorem fails if and only if the core of the corresponding three player majority game is empty. We use this equivalence result to derive all instances in which the Coase Theorem will and will not hold with three parties, and show that the Coase Theorem will actually hold most (over 80 per cent) of the time. We also demonstrate, in contrast to Aivazian and Callen (2003), that it is always possible to find a set of transaction costs which, when introduced into a frictionless bargaining situation, will cause an empty core to become non-empty. In other words, with suitably designed transaction costs, it is possible for the Coase Theorem to hold in cases where, in the absence of those transaction costs, it would fail to hold. When there are three parties, rather than hindering agreements, transaction costs can encourage Coasean bargaining.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 40892.
Date of creation: Aug 2012
Date of revision:
Coase Theorem; externalities; transaction costs; cooperative games;
Other versions of this item:
- Alex Robson, 2012. "Transaction costs can encourage Coasean bargaining," Discussion Papers in Economics economics:201208, Griffith University, Department of Accounting, Finance and Economics.
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
- C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
- K00 - Law and Economics - - General - - - General (including Data Sources and Description)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-09-03 (All new papers)
- NEP-CDM-2012-09-03 (Collective Decision-Making)
- NEP-GTH-2012-09-03 (Game Theory)
- NEP-MIC-2012-09-03 (Microeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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