Coase and the Constitution: A New Approach to Federalism

Abstract

This paper proposes a new approach to the centuries-old question of federalism. In a word, we approach the problem of federalism from a Coasian or property-rights perspective. That is, instead of attempting to draw an arbitrary boundary line between state and federal spheres of power through traditional legal or semantic analysis of the constitution and previous judicial precedents, this paper proposes the creation of alternative “federalism markets” in which governmental powers and functions would be allocated to Congress, the states, or even private firms through decentralized auction mechanisms and secondary markets. The paper is divided into five parts. Following a brief introduction, part two models existing federal-state disputes as a game of chicken and provides a brief theoretical outline of our alternative approach. Next, part three develops a simple two-part model of federalism markets, specifically, the use of auctions as well as secondary markets for the allocation of state-federal powers. Part four reviews and refutes some salient technical and philosophical objections to our proposed system of federalism markets, while part five concludes.

Keywords: Auctions, Federalism, Property Rights, Ronald Coase, Secondary Markets

JEL Classification: A12, K49