Psychology Dictionary of ArgumentsHome
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| Coase Theorem: The Coase Theorem, proposed by economist Ronald Coase, asserts that in the absence of transaction costs, bargaining between parties will lead to an efficient allocation of resources regardless of the initial assignment of property rights, as long as property rights are well-defined and parties can negotiate freely. The Coase theorem explains for the first time why companies are formed._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Economic Theories on Coase Theorem - Dictionary of Arguments
Parisi I 90 Coase theorem/Economic theories/Sullivan/Holt: The first and most influential work applying experimental methods in studying the Coase Theorem is that of Hoffman and Spitzer (1982)(1). The methodology of this early study has become a jumping-off point for much of the subsequent literature. Experiment/method: After being randomly divided into pairs and assigned identities as A or B, one subject in each pair was randomly selected to be the “controller.” This subject had unilateral authority to select the “number” that would determine experimental payments;(...). Rather than select the number in isolation, however, each controller was permitted to confer face to face with their partner. In these conferences, subjects could complete binding agreements stipulating how final payments would be allocated after a number was selected. Parisi I 91 Controller Choice – Payoff Functions „number“ 0 - Payout to A ($) 0,00 - Payout to B ($) 12.00 „number“ 1 - Payout to A ($) 4.00 - Payout to B ($) 10.00 „number“ 2 - Payout to A ($) 6.00 - Payout to B ($) 6.00 „number“ 3 - Payout to A ($) 8.00 - Payout to B ($) 4.00 „number“ 4 - Payout to A ($) 9.00 - Payout to B ($) 2.00 „number“ 5. - Payout to A ($)10.00 - Payout to B ($) 1.00 „number“ 6 - Payout to A ($) 11.00 - Payout to B ($) 0.00 Source: Hoffman and Spitzer (1982)(1) p.86. Sullivan/Holt: In case it isn’t obvious, this design is an abstract and context-neutral analog of the ideal Coasean bargaining environment with no impediments to bargaining. The socially optimal outcome is number 1, yielding a total payoff of $14.00. Under the circumstances, the Coase Theorem predicts that subjects should negotiate side payments to incentivize selection of number 1 irrespective of the property right, that is, of whether A or B is selected to be the controller. Summarizing data collected in the above treatment as well as others involving three-party bargaining and alternative information structures, Hoffman and Spitzer (1982)(1) find clear support for the Coase Theorem: the efficient outcome is by far the most frequent choice. Somewhat surprisingly, subjects also frequently divide profits evenly, despite the controller’s ostensibly strong bargaining advantage in this design. Several subsequent experiments have demonstrated the causality and empirical robustness of the Coase Theorem’s predictions. Causality: For example, support for the Coase Theorem does not diminish when group size becomes as large as 20 subjects (Hoffman and Spitzer, 1986)(2), when the controller is assigned by competition rather than random chance (Hoffman and Spitzer, 1985)(3), or when asymmetric payoffs or even physical discomfort are involved in negotiation (Coursey, Hoffman, and Spitzer, 1987)(4). Importantly, Coasean bargaining appears to drive these results, as socially efficient outcomes are not usually observed when the design is altered to eliminate the negotiation of side payments (Harrison and McKee, 1985)(5). Transaction costs: (...) just as important as verification of the Coase Theorem under low transaction costs is the task of charting transaction costs sufficient to defeat the efficient reallocation of rights through private bargaining (Coase, 1992(6), p. 717). An early experiment by Schwab (1988)(7) stakes a peg well into the field of transaction-costs-through-complexity. Information asymmetry: Framing bargaining in the rich context of a collective bargaining agreement, the experiment provided subjects with multiple dimensions of value to negotiate over (wages, vacation time, noise reduction, and a “relocation clause”), introduced incomplete information (subjects could state their preferences, but could not reveal their actual payoff schedules), and admitted multiple Pareto efficient outcomes. Few subjects, in this experiment, were able to negotiate their way to socially optimal outcomes. >Coase theorem/Kahneman. Endowment effect: One consideration is the endowment effect - the tendency of property owners to value assets more than prospective buyers (Kahneman et al., 1991)(8).* Merely changing the basic experiment so that bargaining concerns the controller’s ownership of a tangible chocolate bar significantly reduces subjects’ ability to negotiate an efficient reallocation of property rights (Kahneman, Knetsch, and Thaler, 1990)(10). Efficiency: Experiments also show reduced allocative efficiency when the process of bargaining entails explicit negotiation costs (Rhoads and Shogren, 1999)(11) and when negotiators operate under asymmetric information (McKelvey and Page, 2000)(12). Uncertainty: Interestingly, there is some evidence that uncertain property rights may actually increase efficiency by incentivizing negotiation as opposed to entrenchment (Cherry and Shogren, 2005(13); see also Croson and Johnston, 2000(14). * Experimental evidence is not fully supportive of the endowment effect. For an extensive survey and critique, see Klass and Zeiler (2013)(9). 1. Hoffman, E. and M. L. Spitzer (1982). “The Coase Theorem: Some Experimental Tests.” Journal of Law and Economics 25(1): 73–98. 2. Hoffman, E. and M. L. Spitzer (1986). “Experimental Tests of the Coase Theorem with Large Bargaining Groups.” Journal of Legal Studies 15(1): 149–171. 3. Hoffman, E. and M. L. Spitzer (1985). “Entitlements, Rights, and Fairness: An Experimental Examination of Subjects’ Concepts of Distributive Justice.” Journal of Legal Studies 14(2): 259–297. 4. Coursey, D. L., E. Hoffman, and M. L. Spitzer (1987). “Fear and Loathing in the Coase Theorem: Experimental Tests Involving Physical Discomfort.” Journal of Legal Studies 16: 217–248. 5. Harrison, G. W. and M. McKee (1985). “Experimental Evaluation of the Coase Theorem.” Journal of Law and Economics 28(3): 653–670. 6. Coase, R. H. (1992). “The Institutional Structure of Production.” American Economic Review 82(4): 713–719. 7. Schwab, S. (1988). “A Coasean experiment on contract presumptions.” Journal of Legal Studies 17(2): 237–268. 8. Kahneman, D., J. L. Knetsch, and R. H. Thaler (1991). “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias.” Journal of Economic Perspectives 5(1): 193–206. 9. Klass, G. and K. Zeiler (2013). “Against Endowment Theory: Experimental Economics and Legal Scholarship.” UCLA Law Review 61: 2–64. 10. Kahneman, D., J. L. Knetsch, and R. H. Thaler (1990). “Experimental tests of the Endowment Effect and the Coase Theorem.” Journal of Political Economy 98(6): 1325–1348. 11. Rhoads, T. A. and J. F. Shogren (1999). “On Coasean Bargaining with Transaction Costs.” Applied Economics Letters 6: 779–783. 12. McKelvey, R. D. and T. Page (2000). “An Experimental Study of the Effect of Private Information in the Coase Theorem.” Experimental Economics 3(3): 187–213. 13. Cherry, T. L. and J. F. Shogren (2005). “Costly Coasean Bargaining and Property Right Security.” Environmental & Resource Economics 31(3): 349–367. 14. Croson, R. and J. S. Johnston (2000). “Experimental Results on Bargaining Under Alternative Property Rights Regimes.” Journal of Law, Economics, and Organization 16(1): 50–73. Sullivan, Sean P. and Charles A. Holt. „Experimental Economics and the Law“ In: Parisi, Francesco (ed) (2017). The Oxford Handbook of Law and Economics. Vol 1: Methodology and Concepts. NY: Oxford University Press._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Economic Theories Parisi I Francesco Parisi (Ed) The Oxford Handbook of Law and Economics: Volume 1: Methodology and Concepts New York 2017 |
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