Inefficient coasean negotiations over emissions and transfers

This article analyses the outcomes of multilateral and sequential negotiation procedures in a Rubinstein alternating-offers model where two polluters and a victim bargain over both, transfers and pollution levels. We show that the Coase Theorem does not hold in a multilateral framework if sequential negotiations are possible (not imposed), although there are no frictions and no delays between stages. Sequential negotiations lead to emission levels which are not socially optimal, but players involved in the first agreement in the sequential path may prefer this path and hence launch it. We also show that when negotiations focus only on transfers, as commonly assumed, the inefficiency vanishes. Finally, we show that the inefficiency can be explained by the player’s inside options, which are given by their potential temporary disagreement payoffs, despite the fact that agreements are reached immediately in equilibrium. Results are generalized to a large number of polluters.