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Transaction costs can encourage Coasean bargaining

  • Alex Robson

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

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File URL: https://www120.secure.griffith.edu.au/research/items/37a49173-f64d-4d24-b953-8731a649636b/1/2012-08-transaction-costs-can-encourage-coasean-bargaining.pdf
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Paper provided by Griffith University, Department of Accounting, Finance and Economics in its series Discussion Papers in Economics with number economics:201208.

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Date of creation: Aug 2012
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Handle: RePEc:gri:epaper:economics:201208
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  1. Nabil Al-Najjar, Luca Anderlini & Leonardo Felli, 2003. "Transaction Costs and the Robustness of the Coase Theorem," Working Papers gueconwpa~03-03-28, Georgetown University, Department of Economics.
  2. Varouj Aivazian & Jeffrey Callen, 2003. "The Core, Transaction Costs, and the Coase Theorem," Constitutional Political Economy, Springer, vol. 14(4), pages 287-299, December.
  3. Alexander R. W. Robson & Stergios Skaperdas, 2002. "Costly Enforcement of Property Rights and the Coase Theorem," CESifo Working Paper Series 762, CESifo Group Munich.
  4. Dixit, Avinash & Olson, Mancur, 2000. "Does voluntary participation undermine the Coase Theorem?," Journal of Public Economics, Elsevier, vol. 76(3), pages 309-335, June.
  5. Martin J. Osborne & Ariel Rubinstein, 1994. "A Course in Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262650401, June.
  6. Aivazian, Varouj A & Callen, Jeffrey L, 1981. "The Coase Theorem and the Empty Core," Journal of Law and Economics, University of Chicago Press, vol. 24(1), pages 175-81, April.
  7. Wittman, Donald, 1989. "Why Democracies Produce Efficient Results," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1395-1424, December.
  8. Parisi, Francesco, 2003. " Political Coase Theorem," Public Choice, Springer, vol. 115(1-2), pages 1-36, April.
  9. Coase, R H, 1981. "The Coase Theorem and the Empty Core: A Comment," Journal of Law and Economics, University of Chicago Press, vol. 24(1), pages 183-87, April.
  10. Gordon Tullock, 1959. "Problems of Majority Voting," Journal of Political Economy, University of Chicago Press, vol. 67, pages 571.
  11. Barbara Luppi & Francesco Parisi, 2012. "Politics with(out) Coase," International Review of Economics, Springer, vol. 59(2), pages 175-187, July.
  12. Bernholz, Peter, 1997. "Property rights, contracts, cyclical social preferences and the Coase theorem: A synthesis," European Journal of Political Economy, Elsevier, vol. 13(3), pages 419-442, September.
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