Transaction Costs and the Robustness of the Coase Theorem

Abstract

This paper explores the extent to which ex ante transaction costs may lead to failures of the Coase Theorem. In particular we identify the basic ‘hold‐up problem’ that arises whenever the parties to a Coasian negotiation have to pay ex ante costs for the negotiation to take place. We then show that a ‘Coasian solution’ to this problem is not available: a Coasian solution typically entails a negotiation about the payment of the costs associated with the future negotiation, which in turn is associated with a fresh set of ex ante costs, and hence a new hold‐up problem.

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