# The Coase Theorem and the Theory of the Core

**DOI:**https://doi.org/10.1007/978-1-4614-7883-6_623-1

## Abstract

Aivazian and Callen (1981) and a number of their subsequent papers use cooperative game theory and core theory to show that the Coasean efficiency result is not robust when there are more than two players. Drawing primarily on their results, this chapter systematically explains the main argument and its extensions as follows. First, the Coase theorem could break down when there are more than two participants because the core of the negotiations may be empty under one set of property rights and nonempty under another. Second, transaction costs will tend to aggravate the empty core problem and make it more likely that the Coasean efficiency result will fail. Third, Pareto optimality can be achieved when the core is empty by the imposition of constraints on the bargaining process and the use of penalty clauses and binding contracts. Overall, the results indicate that it is important to distinguish between transaction costs (when the core exists) and costs due to the empty core because each has different implications for rationalizing institutions. This chapter also summarizes experimental results indicating that the existence of the core is an important determinant of negotiations generally and the Coase theorem in particular. It also points out that some of the problems raised for Coasean efficiency by the empty core also arise under alternative (non-core) notions of coalitional stability.

## Keywords

Transaction Cost Coalition Formation Coalition Structure Grand Coalition Bargaining Process## References

- Aivazian VA, Callen JL (1981) The Coase theorem and the empty core. J Law Econ 24(1):175–181. Reprinted in R.A. Posner and F. Parisi (eds.) The Coase Theorem. Economics Approaches to Law Series. 2013. Edward Elger Publishing.CrossRefGoogle Scholar
- Aivazian VA, Callen JL (2003) The core, transaction costs, and the Coase theorem. Constit Polit Econ 14(4):287–299CrossRefGoogle Scholar
- Aivazian VA, Callen JL, Lipnowski I (1987) The Coase theorem and coalitional stability. Economica 54(216):517–520. Reprinted in R.A. Posner and F. Parisi (eds.) The Coase Theorem. Economics Approaches to Law Series. 2013. Edward Elger Publishing.CrossRefGoogle Scholar
- Aivazian VA, Callen JL, McCracken S (2009) Experimental tests of core theory and the Coase theorem: inefficiency and cycling. J Law Eco 52(4):745–759. Reprinted in R.A. Posner and F. Parisi (eds.) The Coase Theorem. Economics Approaches to Law Series. 2013. Edward Elger Publishing.CrossRefGoogle Scholar
- Anderlini L, Felli L (2006) Transactions costs and the robustness of the Coase theorem. Econ J 116(508):223–245CrossRefGoogle Scholar
- Arrow KJ (1979) The property rights doctrine and demand revelation under incomplete information. In: Boskin MJ (ed) Economics and human welfare: essays in honor of Tibor Scitovsky. Academic Press, New York, pp 23–29CrossRefGoogle Scholar
- Aumann RJ, Maschler M (1964) The bargaining set for cooperative games. In: Dresher M, Shapley LS, Tucker AW (eds) Advances in game theory. Princeton University Press, Princeton, pp 443–476Google Scholar
- Bernholz P (1997) Property rights, contracts, cyclical social preferences and the Coase theorem: a synthesis. Eur J Polit Econ 13:419–442CrossRefGoogle Scholar
- Coase R (1960) The problem of social cost. J Law Econ 3(1):1–44CrossRefGoogle Scholar
- Coase R (1981) The Coase theorem and the empty core: a comment. J Law Econ 24(1):183–187CrossRefGoogle Scholar
- Davis OA, Whinston AW (1965) Some notes on equating private and social cost. South Eco J 32(2):113–126CrossRefGoogle Scholar
- De Bornier JM (1986) The Coase theorem and the empty core: a reexamination. Int Rev Law Econ 6(2):265–271CrossRefGoogle Scholar
- Guzzini E, Palestrini A (2009) The empty core in the Coase theorem: a critical assessment. Econ Bull 29(4):3095–3103Google Scholar
- Hurwicz L (1995) What is the Coase theorem? Jpn World Econ 7:49–74CrossRefGoogle Scholar
- Mueller DC (2003) Public choice III. Cambridge University Press, New YorkCrossRefGoogle Scholar
- Shubik M (1983) Game theory in the social sciences: concepts and solutions, vol 1. M.I.T. Press, Cambridge, MAGoogle Scholar
- Shubik M (1984) Game theory in the social sciences: a game theoretic approach to political economy, vol 2.M.I.T. Press, Cambridge, MAGoogle Scholar
- Telser L (1994) The usefulness of core theory in economics. J Econ Perspect 8(2):151–164CrossRefGoogle Scholar