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Transaction costs can encourage Coasean bargaining

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  • Alex Robson

Abstract

When there are three parties, instability problems brought about by the emptiness of the core of the corresponding cooperative game may cause the Coase Theorem to fail, even when other more direct impediments to bargaining are low. 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, instability problems will cause the Coase Theorem to fail 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 a priori, such instability problems are likely to be rare—the Coase Theorem will actually hold most (over 80 %) of the time. We also demonstrate 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, transaction costs can mitigate instability problems: situations exist in which the presence of transaction costs will cause the Coase Theorem to hold when, in the absence of those direct transaction costs, it would fail to hold. When there are three parties, rather than hindering agreements, the existence of direct transaction costs can sometimes—but not always—reduce instability and encourage Coasean bargaining. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Alex Robson, 2014. "Transaction costs can encourage Coasean bargaining," Public Choice, Springer, vol. 160(3), pages 539-549, September.
  • Handle: RePEc:kap:pubcho:v:160:y:2014:i:3:p:539-549
    DOI: 10.1007/s11127-013-0117-3
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    Cited by:

    1. Stéphane Gonzalez & Alain Marciano, 2017. "De nouveaux éclairages sur le théorème de Coase et la vacuité du cœur," Revue d'économie politique, Dalloz, vol. 127(4), pages 579-600.
    2. L'aszl'o K'allay & Tibor Tak'acs & L'aszl'o Trautmann, 2020. "Transaction Costs: Economies of Scale, Optimum, Equilibrium and Efficiency," Papers 2008.10348, arXiv.org.
    3. Ian A. MacKenzie & Markus Ohndorf, 2014. "Coasean Bargaining in the Presence of Pigouvian Taxation: Revisiting the Buchanan-Stubblebine-Turvey Theorem," Discussion Papers Series 515, School of Economics, University of Queensland, Australia.
    4. MacKenzie, Ian A. & Ohndorf, Markus, 2016. "Coasean bargaining in the presence of Pigouvian taxation," Journal of Environmental Economics and Management, Elsevier, vol. 75(C), pages 1-11.

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    More about this item

    Keywords

    Coase Theorem; Externalities; Transaction costs; Cooperative games; C71; C78; D23; D62; K0;
    All these keywords.

    JEL classification:

    • 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)

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