The meaning and impact of the Coase Theorem
Recent years have seen a surge in scholarship that critically evaluates the origins and impact of the law and economics movement. Out of the many theoretical bedrocks of the movement, the Coase Theorem is one of the most significant. Stemming from Ronald Coase’s 1960 paper “The Problem of Social Cost,” the theorem itself was coined by George Stigler in his 1966 book The Theory of Price. (Click here for a very simple primer on the theorem as it is generally taught.)
A 1999 paper by STEVEN MEDEMA—an economist and historian who has written extensively on Coase and his legacy—looks at the role that the Coase theorem has played in the law and economics movement:
In spite of the often heavily ideological overtones of the Coase theorem debate, the theorem is simply a positive proposition, stating that under certain conditions a particular result will follow. Yet, the Coase theorem has been assailed from the left (as conservative dogma) and from the right (as liberal dogma); its moral, philosophical, and political underpinnings have been called into question; its logic, applicability, and empirical content have been both trashed and defended; it has been hailed as offering a new way to conceptualize law and legal culture and attacked as anathema to the traditional common law process. The present essay will attempt to explain how and why the Coase theorem quickly evolved from a debunking fiction to the basis of one of the most successful branches of applied economics in the last part of this century.
Link to the paper.
- Ronald Coase’s seminal paper “The Problem of Social Cost.” Link. And an interview with Coase from 1997, in which he says: “I think the success of the Coase Theorem—because it’s discussed all over the place—is an interesting illustration of what’s wrong with economics. If you read ‘The Problem of Social Cost,’ it occupies perhaps four pages. It’s useful because you can show the type of contracts that would have to be made in order to have an efficient economic system. But then you have to introduce the obstacles to doing it. Then you see how the system actually works.” Link.
- A 1998 paper by Deirdre McCloskey examines the legacy of the theorem: “Something like a dozen people in the world understand that the ‘Coase’ theorem is not the Coase theorem. One of this select group is Ronald Coase himself, so I suspect we blessed few are right.” Link.
- A post by Steven Medema on VoxEU treats Coase’s legacy and the distance between his own views and the school of thought which adopted the theorem bearing his name. Link. Another paper by Medema examines the Coase Theorem on its sixtieth anniversary. Link.
- Robin Hahnel and Kristen Sheeran provide an “internal critique” of the theorem, arguing that even under optimal conditions—low transaction costs and well-defined property rights—it generates perverse incentives. Link.
- A 2017 paper by Dina Waked—”Sense and Nonsense of the Economic Analysis of Tort Law”—situates the law and economics school (and its invocation of Coase) alongside earlier and more recent alternatives, including the early institutionalists. Link.
New Researchers: DOMINANT DIVIDEND
How the interests of capital owners shape government response to crises
PhD Candidate in Government at Cornell University JIMENA VALDEZ studies the different ways that states interact with large concentrations of capital, both foreign and domestic. In a pre-published paper which is currently under review, she compares responses to the Eurozone crisis in Portugal and Spain, two countries which, despite facing similar external pressures to decentralize wage bargaining following the crisis, ultimately exhibited divergent responses. According to Valdez’s research, the ability of governments to liberalize labor markets depended on the size and affiliations of their export competing sector.
From the paper’s introduction:
On September 7 of 2012, Pedro Passos Coelho, the Prime Minister of Portugal, broadcast a message from his official residence announcing the strategy to recover from the Eurozone crisis—a combination of austerity, public spending cuts, tax increases, and pro-market reforms. While the Portuguese people went into the streets to protest, the main business associations had an unexpectedly similar reaction—immediate and public rejection. The government withdrew the measure two weeks later. By contrast, when on July 11, 2012 the Spanish Prime Minister Mariano Rajoy went to the Parliament to announce the largest economic adjustment of the democratic era—a combination of cuts to public servants, unemployed and dependent people, as well as an increase in taxes—the business sector applauded it. Juan Rosell, the head of the Spanish Confederation of Business Organizations, said that the economy required “deep, painful and courageous” reforms and asked for further reductions in expenditures and less increase in taxes.
Against the common assumption that the liberalization of labor markets is not only sought, but widely embraced by capital, I show that, beyond a general preference for lower labor costs, business interests are heterogeneous and influence policy in unexpected ways. I advance the theory that business positions on liberalization are shaped by international exposure and sectoral production strategies, as well as binding associational commitments. Corresponding to these variables, business will have different preferences for the different dimensions of labor liberalization—employment protection legislation (EPL) and collective bargaining (CB). In addition, policy-makers mostly take into account the interests of those business sectors that are relevant to the model of economic growth they prefer, and dismiss the rest.”
A draft of the paper is available upon request, via Valdez’s website.
Each week we highlight great work from a graduate student, postdoc, or early-career professor. Have you read any excellent research recently that you’d like to see shared here? Send it our way: firstname.lastname@example.org.
- Among the persisting arguments in favor of minimum income requirements for EITC recipients is their effect on labor supply. A newly published (and widely anticipated) paper by Henrik Kleven casts doubt on existing evidence which supports this claim: “I show that the employment effects align closely with exposure to welfare reform and the business cycle. Single mothers who were unaffected by welfare reform (but eligible for the EITC) did not respond. Overall and contrary to consensus, the case for sizable extensive margin effects of the EITC is fragile.” Link.
- “Economics has contributed disturbingly little to discussions about climate change. This is a moment for our discipline to engage in a careful discussion of priorities and what it can contribute.” From VoxEu, a bibliometric analysis on economists’ barely existing contributions to discourse on climate change. Link.
- An essay adapted from Katrina Forrester’s new book on post-war liberal philosophy. “Rawls’s ideas were developed during a very distinctive period of U.S. history, and his theory bears an intimate connection to postwar liberal democracy. Is liberal political philosophy complicit in its failures? Is political philosophy, like liberalism itself, in crisis, and in need of reinvention? And if so, what does its future look like?” Link.
- “High student debt levels and systemic racism have created a vicious cycle for Black students.” In a new paper, Suzanne Kahn, Mark Huelsman, and Jen Mishory consider the compounding effects of student debt and the racial wealth gap. Link.
- An arbitration next week may have large consequences for Uber, and determine the legality of its surge pricing feature. Link. Via Marshall Steinbaum, who wrote an article about this back in 2016. Link.
- In the Annual Review of Environment and Resources, on “The State of the World’s Mangrove Forests,” by Daniel A. Friess et. al. Link.
- Ioana Marinescu, Ivan Ouss, and Louis-Daniel Pape on labor market concentration, wages, and hires: more concentration, fewer hires, lower wages. Link.
- A paper by Alice Evans looks at the dynamics of reform campaigns, with supply chain legislation as its case study: “Many activists are stuck in a despondency trap. Never seeing radical reform, they assume it is impossible, moderate their ambitions, and invest in more feasible but sub-optimal alternatives. This creates a negative feedback loop, in which the dearth of radical reform becomes self-fulfilling. But if reformists see advances at home and abroad, they may become more optimistic about collective mobilization and break out of their despondency trap. This is shown by tracing the drivers of ground-breaking legislation.” Link.
- From the Cambridge Journal of Economics, a special issue on the nuances of financialized capitalism. Link.
- Sean O-Brady examines “trends in wages, working hours, pensions and healthcare in food retail in Canada, Germany, Sweden and the USA between 1980 and 2016,” finding that “Precariousness increased in each country, but the form and degree of change differed markedly, reflecting the effects of product market competition, bargaining centralization and labour regulation.” Link.
- In a new report for the Ash Center, Colleen Mathis, Daniel Moskowitz and Benjamin Schneer consider how independent redistricting commissions improved democratic representation in states like Arizona: “When states create independent redistricting commissions, they remove the authority for drawing electoral lines from politicians and hand it over to independent bodies consisting of multi-partisan citizen volunteers who do not hold public office.” Link.
- “This article explores the challenges of redefining property rights for land, with application to monarchical Iraq from 1944 to 1958. We apply two processes in the analysis of economic institutions to study history: a puzzle-solving method at the micro level, with broader interest in the role of institutions in development and economic growth at the macro level. Thus, we explore the interaction between demanders and suppliers of land reform in the political market, focusing on the parliamentary influence of big landholders as an interest group. We conclude that despite increasing demand for land reform, politicians were able to supply quantitative change only, consisting of the allocation of newly arable land to landless cultivators, rather than the redistribution of existing assets or qualitative change.” The Political Economy of Property Rights in Monarchical Iraq, by Omar A. M. El-Joumayle and Bassam Yousif. Link.
Each week we highlight research from a graduate student, postdoc, or early-career professor. Send us recommendations: email@example.com.