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.
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Bertrand Crettez, The Coase Theorem, the Nonempty Core, and the Legal Neutrality Principle, Review of Law and Economics. Published Online: 2019-10-17. DOI: https://doi.org/10.1515/rle-2018-0027.
First posted 2019-10-18 06:38:45
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