Abstract

http://ssrn.com/abstract=2403839
 


 



Coasean Keep-Away: Voluntary Transaction Costs


Jordan M. Barry


University of San Diego School of Law

John William Hatfield


University of Texas at Austin

Scott Duke Kominers


Harvard University

March 3, 2014

San Diego Legal Studies Paper No. 14-149

Abstract:     
The Coase Theorem predicts that, if there are no transaction costs, parties will always contract their way to an efficient outcome. Thus, no matter which legal rules society chooses, "Coasean bargains" will lead to efficient results.

There are always some transaction costs. However, transaction costs are often thought to be low when there are no structural impediments to negotiation, such as large numbers of parties or barriers to communication. When these obstacles are not present, it is commonly assumed that the parties will achieve an efficient result through Coasean bargaining. We show that this assumption is incorrect.

In particular, we demonstrate that transaction costs can be high, even when there are no structural impediments to bargaining, because the parties themselves may intentionally create transaction costs. Intuitively, an individual may prefer the Coasean bargain that is struck when certain parties are excluded from negotiations. Accordingly, that individual will wish to create transaction costs that keep those parties — potentially including herself — away from the negotiating table. We show that there are many contexts in which the parties will choose to create these "voluntary transaction costs," including environmental litigation, multilateral treaty negotiations, and creditor-debtor relationships.

Because of the prevalence of voluntary transaction costs, Coasean logic applies to a significantly smaller class of cases than has previously been recognized. This renders law very important: Legal rules provide the starting point for the parties' negotiation; we find that when the parties’ starting point is closer to the efficient result, they are more likely to achieve an efficient outcome through Coasean bargaining. This insight favors reasonable use rules and other legal rules that attempt to assign entitlements in an efficient manner. We also find that liability remedies are more likely to encourage efficient outcomes than injunctive remedies are.

Number of Pages in PDF File: 67

Keywords: Coase Theorem, transaction costs, private ordering, efficiency, liability rules, property rules, remedies, reasonable use

JEL Classification: C71, C78, D23, D47, D69, D79, K00, K11, K13

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Date posted: March 4, 2014  

Suggested Citation

Barry, Jordan M. and Hatfield, John William and Kominers, Scott Duke, Coasean Keep-Away: Voluntary Transaction Costs (March 3, 2014). San Diego Legal Studies Paper No. 14-149. Available at SSRN: http://ssrn.com/abstract=2403839 or http://dx.doi.org/10.2139/ssrn.2403839

Contact Information

Jordan Barry
University of San Diego School of Law ( email )
5998 Alcala Park
San Diego, CA 92110-2492
United States
John William Hatfield
University of Texas at Austin ( email )
Austin, TX 78712
United States
Scott Duke Kominers (Contact Author)
Harvard University ( email )
One Brattle Square, suite 6
Cambridge, MA 02138
United States
HOME PAGE: http://www.scottkom.com/
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