Confining the Coase Theorem: Contracting, Ownership, and Free-Riding

The Review of Economic Studies, Forthcoming

Posted: 14 Nov 2015

See all articles by Tore Ellingsen

Tore Ellingsen

Stockholm School of Economics - Department of Economics; Norwegian School of Economics (NHH) - Department of Economics

Elena Paltseva

Stockholm Institute of Transition Economics (SITE); New Economic School (NES)

Date Written: July 15, 2015

Abstract

If individuals own the right to take any action that they please, and are free to contract about behavior, will outcomes be efficient in all situations? That is, does the Coase theorem hold? We study this classic question through the lens of a non-cooperative model of contract negotiations, considering both compulsory and voluntary participation in negotiations. In either case, we find that all consistent equilibria of the contracting game are efficient in the case of two players. But if participation is voluntary, and there are more than two players, there are situations in which all consistent equilibria are inefficient. Specifically, the provision of public goods tends to be inefficiently low due to strategic abstention from contracting. Free-riding on others' agreements can be avoided if individuals do not own all their actions. When actions involve the use of assets, efficient action ownership may correspond to collective rather than individual asset ownership.

Keywords: Contracting, Renegotiation, Ownership, Property rights

JEL Classification: C78, D23

Suggested Citation

Ellingsen, Tore and Paltseva, Elena, Confining the Coase Theorem: Contracting, Ownership, and Free-Riding (July 15, 2015). The Review of Economic Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2689708

Tore Ellingsen (Contact Author)

Stockholm School of Economics - Department of Economics ( email )

P.O. Box 6501
Sveavagen 65
S-113 83 Stockholm
Sweden
+46 8 736 9260 (Phone)
+46 8 31 3207 (Fax)

Norwegian School of Economics (NHH) - Department of Economics

Helleveien 30
N-5035 Bergen
Norway

Elena Paltseva

Stockholm Institute of Transition Economics (SITE) ( email )

P.O. Box 6501
S-113 83 Stockholm, 11383
Sweden

New Economic School (NES) ( email )

100A Novaya Street
Moscow, Skolkovo 143026
Russia

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