Experiment for Positive Externalities: Is Coase Theorem Applicable to the Positive Externalities?

Naoyuki Kaneda

Gakushuin Economic Papers, 2010, vol. 47, issue 1, 1-12

Abstract: There are many arguments in economic and legal research about Coase theorem. In 1960, Coase took an example of negative externalities and argued that the efficiency is achieved regardless of the liability rule. He took the example of straying cattle which destroy crops growing on neighboring land. In his example, a farmer and a cattle-raiser are operating on neighboring properties. He further supposes that, without any fencing between the properties, an increase in the size of the cattle-raiser's herd increases the total damage of the farmer's crop. He concluded that the ultimate result is independent of the legal position (whether the cattle-raiser is liable or not for damage), if the pricing system is assumed to work without costs.The experimental literature supports Coase's argument. Hoffman and Spitzer (1982) conducted experiments with bargaining and side payments. Their experimental design simulates the negative externalities in pollution problem. We are aware of few experiments in positive externalities in this literature. This paper deals with bargaining with positive externalities. The experiments in this paper try to simulate the R&D activities among several companies. The results of R&D activities of one firm can easily be replicated by others at lower costs. In this paper's experimental design, each firm may spend its resources on R&D activities, but the results of successful R&D activities benefit all firms, regardless of whether a particular firm spends its resources on that activity. This is an example of positive externalities. My major interests are whether players in the experiments bargain for their benefits and achieve the joint payoff maximum. I deal with two kinds of experiments under positive externalities: Coasian Bargaining with certainty, Coasian bargaining with uncertainty.

Date: 2010
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