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Confining the Coase Theorem: Contracting, Ownership, and Free-Riding

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  • Tore Ellingsen
  • Elena Paltseva

Abstract

If individuals own the right to take any action that they please, and are free to contract about behaviour, will outcomes be efficient in all situations? That is, does the Coase theorem hold? We study this classic question through the lens of a non-cooperative model of contract negotiations, considering both compulsory and voluntary participation in negotiations. In either case, we find that all consistent equilibria of the contracting game are efficient in the case of two players. But if participation is voluntary, and there are more than two players, there are situations in which all consistent equilibria are inefficient. Specifically, the provision of public goods tends to be inefficiently low due to strategic abstention from contracting. Free-riding on others' agreements can be avoided if individuals do not own all their actions. When actions involve the use of assets, efficient action ownership may correspond to collective rather than individual asset ownership.

Suggested Citation

  • Tore Ellingsen & Elena Paltseva, 2016. "Confining the Coase Theorem: Contracting, Ownership, and Free-Riding," Review of Economic Studies, Oxford University Press, vol. 83(2), pages 547-586.
  • Handle: RePEc:oup:restud:v:83:y:2016:i:2:p:547-586.
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    File URL: http://hdl.handle.net/10.1093/restud/rdw001
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    Cited by:

    1. repec:eee:gamebe:v:111:y:2018:i:c:p:85-99 is not listed on IDEAS
    2. Dooseok Jang & Amrish Patel & Martin Dufwenberg, 2016. "Co-financing agreements and reciprocity: When 'no deal' is a good deal," University of East Anglia School of Economics Working Paper Series 2016-12, School of Economics, University of East Anglia, Norwich, UK..
    3. repec:eee:jeeman:v:90:y:2018:i:c:p:217-231 is not listed on IDEAS
    4. Akira Okada, 2018. "Non-cooperative Bargaining for Side Payments Contract," KIER Working Papers 983, Kyoto University, Institute of Economic Research.
    5. Matsushima, Noriaki & Shinohara, Ryusuke, 2019. "Pre-negotiation commitment and internalization in public good provision through bilateral negotiations," Journal of Public Economics, Elsevier, vol. 175(C), pages 84-93.
    6. Harstad, Bård, 2016. "The market for conservation and other hostages," Journal of Economic Theory, Elsevier, vol. 166(C), pages 124-151.

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