Abstract

http://ssrn.com/abstract=2320549
 


 



The Fairness Motive: Coase's Mistake


Ewan McGaughey


London School of Economics

September 4, 2013


Abstract:     
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, K13

working papers series


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Date posted: September 4, 2013  

Suggested Citation

McGaughey, Ewan, The Fairness Motive: Coase's Mistake (September 4, 2013). Available at SSRN: http://ssrn.com/abstract=2320549 or http://dx.doi.org/10.2139/ssrn.2320549

Contact Information

Ewan McGaughey (Contact Author)
London School of Economics ( email )
Houghton Street
London, WC2A 2AE
United Kingdom
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