Abstract
The Coase Theorem is widely regarded as pointing to the importance of positive transaction costs for the analysis of economic institutions. Various interpretations of the Coase Theorem regard transaction costs as some set of impediments to contracting, or more broadly, as the costs of providing institutional solutions to conflicts over resource use. The abstract nature of the Coasean hypothetical tends to promote an abstract notion of property as a thin entitlement: a right in a designated person to take certain actions or derive value from a set of resource attributes. On this view, property is like a collection of tiny contracts. The property rights furnished by actual property law are much more coarse grained than this, and property is correspondingly “incomplete” for transaction costs reasons. Property and contract are substitutes in some situations, but they often are not interchangeable—because of Coasean transaction costs.
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Notes
The authors are of two minds about the plausibility of this common interpretation as an answer to the historical question of what Coase (1960) actually said. Smith considers it a viable possibility; Lee is skeptical. Both authors agree that some older readings, which suggest that Coase believed that transaction costs were zero and bargaining could efficiently resolve any conflict of uses, are incorrect.
Although some transaction costs might vary relatively freely in proportion to the value of the entitlements, which are the subjects of those transactions, other transaction costs are relatively static. Thus, as entitlements become narrower and more fine grained, the gross amount of social utility that can be obtained by reallocating any individual entitlement grows smaller—there simply is less at stake in each individual instance—but the transaction costs of each reallocation remain relatively invariant. As this process of attenuation continues, there are more and more reallocations for which the ever-shrinking gross marginal utility of reallocation has fallen below the static marginal cost of reallocation—i.e. the net marginal utility of reallocation has become negative—and, as result, an increasing fraction of all entitlements cannot feasibly be reallocated. At the limit, all reallocation ceases, with an enormous potential loss in social welfare.
Note that in a world of positive transaction costs individual holders of entitlements will not be able to do this packaging on their own unless the individuals already had a set of entitlements that naturally lend themselves to being combined. (The likelihood of finding a counterparty interested in trading for a cobbled-together hodge-podge of random entitlements is remote.) In other words, creating these packages through purely private ordering would require that the initial allocation has already been designed to provide individuals with entitlements that naturally belong together in packages. Individual packaging then would not be an alternative to the institution of property, but rather would itself depend upon that institution, so long as transaction costs are positive.
When it comes to property, Coase was a hyper-realist, although for his purposes, i.e. to show the working of law on the economy, it was not necessary to settle on one view of property (Merrill and Smith 2001, forthcoming).
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Acknowledgments
Brian Angelo Lee gratefully acknowledges the Brooklyn Law School Dean’s Summer Research Stipend’s financial support for this project. The authors would like to thank Doug Allen and the anonymous reviewers for their valuable comments on an earlier draft. All errors are ours alone.
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Lee, B.A., Smith, H.E. The nature of Coasean property. Int Rev Econ 59, 145–155 (2012). https://doi.org/10.1007/s12232-012-0152-2
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DOI: https://doi.org/10.1007/s12232-012-0152-2