Robson, Alex
(2012):
*Transaction Costs can Encourage Coasean Bargaining.*

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## Abstract

When 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.

Item Type: | MPRA Paper |
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Original Title: | Transaction Costs can Encourage Coasean Bargaining |

Language: | English |

Keywords: | Coase Theorem, externalities, transaction costs, cooperative games |

Subjects: | D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior ; Transaction Costs ; Property Rights D - Microeconomics > D6 - Welfare Economics > D62 - Externalities C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C78 - Bargaining Theory ; Matching Theory C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C71 - Cooperative Games K - Law and Economics > K0 - General > K00 - General |

Item ID: | 40892 |

Depositing User: | Alex Robson |

Date Deposited: | 29 Aug 2012 04:20 |

Last Modified: | 09 Oct 2019 04:32 |

References: | Aivazian,V. and Callen, J.(1981) “The Coase Theorem and The Empty Core”, Journal of Law and Economics, 175-181. Aivazian, V. and Callen, J. (2003) “The Core, Transaction Costs, and the Coase Theorem,” Constitutional Political Economy, 14: 287-299. Benoit, J-P. and Kornhauser, L. (2002) “Game Theoretic Analysis of Legal Rules and Institutions, Chapter 60 in Aumann, R. and Hart, S. (eds) Handbook of Game Theory with Economic Applications, Volume 3, London: North Holland. Bernholz, P. (1997) “Property Rights, Contracts, Cyclical Social Preferences, and the Coase Theorem: A Synthesis,” European Journal of Political Economy, 13: 419-442. Coase, R. (1960) “The Problem of Social Cost,” Journal of Law and Economics, 3: 1-44. Cooter, R. and Ulen, T. (2012) Law and Economics, 6th edition, New York: Prentice Hall. Mueller, D. (2003) Public Choice III, Cambridge: Cambridge University Press. Ordeshook, P. (1986) Game Theory and Political Theory, Cambridge: Cambridge University Press. Osborne, M. and Rubinstein, A. (1994) A Course in Game Theory, Cambridge, MA: MIT Press. Parisi, F. (2008) “Coase Theorem” in Durlauf, S. and Blume, L. (eds) The New Palgrave Dictionary of Economics, London: Palgrave Macmillan. Robson, A. and Skaperdas, S. (2008) “Costly Enforcement of Property Rights and the Coase Theorem,” Economic Theory, 36: 109-128. Robson, A. (2012) Law and Markets, London: Palgrave Macmillan. |

URI: | https://mpra.ub.uni-muenchen.de/id/eprint/40892 |