The Coase Theorem, the Nonempty Core, and the Legal Neutrality Principle

Crettez Bertrand ()
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Crettez Bertrand: Department of Economics, University Panthéon-Assas Paris II, 12, place du Panthéon, Paris, 75005, France

Review of Law & Economics, 2020, vol. 16, issue 1, 16

Abstract: The Coase theorem states that where there are externalities and no transaction costs resource allocation is Pareto-optimal and independent of the stakeholders’ legal position. This result has been challenged many times. In the cooperative game approach to resource allocation, the refutation is made by constructing a three-person game which has an empty core under one set of liability rules—which implies that optimal allocations are coalitionally unstable–and a nonempty core under another set. In this example, however, the probability that the core is non-empty is rather high (5/6). Yet, even if coalitionally stable Pareto-optimal arrangements are likely, to establish the plain validity of the Coase theorem it must be shown that the legal neutrality statement also holds. We show that for the three-person cooperative game example mentioned above, the probability that the two assertions of the Coase theorem hold can be as low as 3/8.

Keywords: Coase theorem; cooperative games; core; legal neutrality (search for similar items in EconPapers)
JEL-codes: C71 C78 D23 D62 K0 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1515/rle-2018-0027

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