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Transaction Costs can Encourage Coasean Bargaining

Alex Robson ()

MPRA Paper from University Library of Munich, Germany

Abstract: When there are three parties, it is well known that the Coase Theorem may not hold even when there are no transaction costs, due to the emptiness of the core of the corresponding cooperative game [Aivazian and Callen (1981)]. We show that the standard Coasean bargaining game involving three parties is strategically equivalent to an asymmetric three player majority game. Hence, when there are three parties, the Coase Theorem fails if and only if the core of the corresponding three player majority game is empty. We use this equivalence result to derive all instances in which the Coase Theorem will and will not hold with three parties, and show that the Coase Theorem will actually hold most (over 80 per cent) of the time. We also demonstrate, in contrast to Aivazian and Callen (2003), that it is always possible to find a set of transaction costs which, when introduced into a frictionless bargaining situation, will cause an empty core to become non-empty. In other words, with suitably designed transaction costs, it is possible for the Coase Theorem to hold in cases where, in the absence of those transaction costs, it would fail to hold. When there are three parties, rather than hindering agreements, transaction costs can encourage Coasean bargaining.

Keywords: Coase Theorem; externalities; transaction costs; cooperative games (search for similar items in EconPapers)
JEL-codes: C71 C78 D23 D62 K00 (search for similar items in EconPapers)
Date: 2012-08
New Economics Papers: this item is included in nep-cdm, nep-gth and nep-mic
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Related works:
Journal Article: Transaction costs can encourage Coasean bargaining (2014) Downloads
Working Paper: Transaction costs can encourage Coasean bargaining (2012) Downloads
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