Information and the Coase Theorem

Abstract

Some economists think the Coase theorem implies a lot about the proper scope of government intervention in the economy and about the welfare consequences of laissez-faire. Others see it as a mere tautology: that if people negotiate efficiently then every outcome will be efficient. The Coase theorem is important only if we believe that efficient negotiation is likely. Of course we can attribute inefficiencies to “bargaining imperfection,” but it may not be useful to do so. Such attitudes sometimes seem to depend more on ideology than on reason. This article gives one economist's reasoned view. It discusses the Coase Theorem as a decentralization result and why decentralization results are interesting. It considers mechanism design for revealing private information, and describes the problems of centralization. Should the Coase theorem should be viewed as a second-best result—property rights are more efficient than some reasonable alternative? Does the Coase theorem recommend an institution or make institutions unnecessary?