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Confining the Coase Theorem: Contracting, Ownership, and Free-Riding

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  • Tore Ellingsen
  • Elena Paltseva

Abstract

If individuals own the right to take any action that they please, and are free to contract about behaviour, will outcomes be efficient in all situations? That is, does the Coase theorem hold? We study this classic question through the lens of a non-cooperative model of contract negotiations, considering both compulsory and voluntary participation in negotiations. In either case, we find that all consistent equilibria of the contracting game are efficient in the case of two players. But if participation is voluntary, and there are more than two players, there are situations in which all consistent equilibria are inefficient. Specifically, the provision of public goods tends to be inefficiently low due to strategic abstention from contracting. Free-riding on others' agreements can be avoided if individuals do not own all their actions. When actions involve the use of assets, efficient action ownership may correspond to collective rather than individual asset ownership.

Suggested Citation

  • Tore Ellingsen & Elena Paltseva, 2016. "Confining the Coase Theorem: Contracting, Ownership, and Free-Riding," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(2), pages 547-586.
    • Handle: RePEc:oup:restud:v:83:y:2016:i:2:p:547-586.
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    File URL: http://hdl.handle.net/10.1093/restud/rdw001
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    Cited by:

    1. Marco Becht & Yuliya Kamisarenka & Anete Pajuste, 2018. "Loyalty Shares with Tenure Voting - a Coasian bargain? Evidence from the Loi Florange Experiment," Working Papers ECARES 2018-10, ULB -- Universite Libre de Bruxelles.
    2. Nicolas Schneider, 2022. "Internalizing Environmental Externalities and the Coase Theorem," World Journal of Applied Economics, WERI-World Economic Research Institute, vol. 8(2), pages 93-100, December.
    3. Valentin Goranko, 2022. "Preplay Negotiations with Unconditional Offers of Side Payments in Two-Player Strategic-Form Games: Towards Non-Cooperative Cooperation," Mathematics, MDPI, vol. 10(14), pages 1-21, July.
    4. Bingham, Logan Robert, 2021. "Vittel as a model case in PES discourse: Review and critical perspective," Ecosystem Services, Elsevier, vol. 48(C).
    5. Eduard Hartwich & Alexander Rieger & Johannes Sedlmeir & Dominik Jurek & Gilbert Fridgen, 2023. "Machine economies," Electronic Markets, Springer;IIM University of St. Gallen, vol. 33(1), pages 1-13, December.
    6. Dooseok Jang & Amrish Patel & Martin Dufwenberg, 2016. "Co-Financing Agreements and Reciprocity: When 'No Deal' is a Good Deal," CESifo Working Paper Series 6213, CESifo.
    7. McEvoy, David M. & McGinty, Matthew, 2018. "Negotiating a uniform emissions tax in international environmental agreements," Journal of Environmental Economics and Management, Elsevier, vol. 90(C), pages 217-231.
    8. Steven G. Medema, 2020. "The Coase Theorem at Sixty," Journal of Economic Literature, American Economic Association, vol. 58(4), pages 1045-1128, December.
    9. Joel Watson, 2024. "Contractual Chains," Econometrica, Econometric Society, vol. 92(5), pages 1735-1774, September.
    10. Daske, Thomas, 2019. "Efficient Incentives in Social Networks: "Gamification" and the Coase Theorem," EconStor Preprints 193148, ZBW - Leibniz Information Centre for Economics.
    11. Sadowski, Arkadiusz & Samoląg, Monika, 2020. "Functioning of the Family 500+ program on a selected example of rural areas," Rural Areas and Development, European Rural Development Network (ERDN), vol. 17.
    12. Techer, Kevin, 2021. "Stable agreements through liability rules: A multi-choice game approach to the social cost problem," Mathematical Social Sciences, Elsevier, vol. 111(C), pages 77-88.
    13. Harstad, Bård, 2016. "The market for conservation and other hostages," Journal of Economic Theory, Elsevier, vol. 166(C), pages 124-151.
    14. Matsushima, Noriaki & Shinohara, Ryusuke, 2019. "Pre-negotiation commitment and internalization in public good provision through bilateral negotiations," Journal of Public Economics, Elsevier, vol. 175(C), pages 84-93.
    15. Kwon-Sik Kim & Seong-ho Jeong, 2019. "Free Riding without Dead Weight Losses," Sustainability, MDPI, vol. 11(19), pages 1-15, September.
    16. Nyborg, Karine, 2021. "A perfectly competitive economy is an economy without welfare relevant endogenous learning," Memorandum 2/2021, Oslo University, Department of Economics.
    17. Jang, Dooseok & Patel, Amrish & Dufwenberg, Martin, 2018. "Agreements with reciprocity: Co-financing and MOUs," Games and Economic Behavior, Elsevier, vol. 111(C), pages 85-99.
    18. Akira Okada, 2018. "Non-cooperative Bargaining for Side Payments Contract," KIER Working Papers 983, Kyoto University, Institute of Economic Research.
    19. Aivazian, Varouj A. & Callen, Jeffrey L., 2023. "The Coase Theorem and the empty core: Inspecting the entrails after four decades," International Review of Law and Economics, Elsevier, vol. 73(C).

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