Political Coase Theorem

Abstract

This article considers the applicability of the Coase theorem (in both its positive and normative formulations) to the political market. The article analogizes the choice of decision rules in the political market to the choice of legal rules in the traditional Coase theorem and further analogizes alternative initial coalitions to the different initial allocations of entitlements considered by Coase (1960). On the basis of these analogies, the paper examines the relevance (or lack thereof) of alternative voting rules and initial coalitions on the final political outcome. The article further shows that, if all voters are allowed to enter into Coasian bargaining over the policy outcome to be adopted by the majority coalition (i.e., if political bargains are possible and are enforceable), uniqueness and stability are obtained. The analysis of the axiomatic Nash bargaining equilibrium yields an interesting geometric intuition. If voters have similar utility functions centered around different ideal policy points, the Coasian bargaining will be conducive to the center of mass of the policy space, which weighs the agents' preferences as revealed in the bargaining process. Such ideal equilibrium satisfies most criteria of social welfare. The article concludes considering the various practical limits of this ideal political market, whenever collective action and agency problems affect the political bargaining in a representative or direct democracy.