The Fairness Motive: Coase's Mistake
London School of Economics
September 4, 2013
Ronald Coase's distinguished contribution to law and economics rested on a simplification of how market exchanges work. In particular, Coase and the Chicago tradition he was a part of, rejected inequality of bargaining power as a relevant factor in market exchanges. This meant that Coase offered an unduly limited account of what led to economic efficiency. Behavioral research has confirmed an older, and more persistent view in economic theory that fairness matters to how productively people work. Because we all have a "fairness motive" (and not just a "profit motive") unequal bargaining power hampers the productive efficiency of market exchanges. It follows that Coase's theory of social cost -- that if we may contract around legal rights, absent transaction costs, the outcomes will be efficient -- was mistaken. Unjust exchanges affect the motivation of work, and so initial delineations of rights have profound consequences for productive efficiency. This is demonstrated using Coase's examples from English case law.
Number of Pages in PDF File: 8
Keywords: Coase, social cost, tort, contract, efficiency, legal rights, bargaining power
JEL Classification: B10, D10, K11, K12, K13working papers series
Date posted: September 4, 2013
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