This is a great comment. It made me realize that Coase can be applied to a dollar auction, which is really neat.
Seems inconsistent with the Coase Theorem...
Let’s unpack that.
In the dam story, a Coase theorem solution would mean that each family pays the other to not build dams (since building a dam imposes an externality on the other family). In principle, this could work out to net-zero cash changing hands, since each family pays the other. It would just fix the incentives. So yeah, that does sound like a pretty good and feasible solution in the two-player case.
The usual failure mode of the Coase theorem is that it requires too much coordination when in many-player scenarios, so what would that look like? One generalization is to apply Coase directly to the prototypical all-pay auction: the dollar auction, an all-pay auction in which one dollar is auctioned off. Bidding in the dollar auction imposes an externality on the other bidders—they effectively lose their bid amount. Coase says that bidders can solve this by paying other players to not bid. In a many-player scenario, it won’t make sense for any one player to pay the others enough to stop bidding (e.g. with 100 bidders in an all-pay auction, I’ll want to pay the other bidders at most ~1 cent). If many players each offer to pay all the other players to stop bidding, then it can work, but that also creates a potential free-rider problem and coordination will be hard with so many people.
Seems very consistent with views of rent-seeking as a negative-sum game.
The rent-seeking is all the efforts to build the dams that exceed the benefits of getting the additional territory. Using rent-seeking in a very broad sense a al political economy/public choice literature. Clearly there is some type of benefit each side gets from increasing their territories—that would be the rent they expect to collect by having ownership of the additional territory.
Each side if paying more to move the property line (reassign the property right to come area) than they are getting from actually owning the land. This occurs after they have already agreed on an allocation of property rights. Per Coase, all the remaining adjustments would then be payments by one side to the other for access/use or ownership. But why would they respect the allocation of rights by Coase more than the allocation they agreed among themselves?
Coase either needs Leviathan or a well shared and respected view of property rights. This last point seems a bit similar to a critique I heard James Buchannan made of David Friedman’s Machinery of Freedom thesis. That is, the theory fails if all protection agencies do not hold the same fundamental understanding of property rights. Perhaps that same problem plagues Coase in this type of setting. In other words, Coase requires a shared property rights regime that is generally accepted, as is the external enforcement of those rights by outside parties. I had never real considered that type of constraint on Coase before.
Do you have some pointers to the many-player problem you mention—hopefully not too mathy or with a good verbal summary of the argument. Or is what I’ve just “discovered” the general thrust of that problem?
I picked up my understanding of Coase from Law’s Order.
Coase either needs Leviathan or a well shared and respected view of property rights.
This seems wrong. Even in the example at hand (i.e. the dams), there’s no Leviathan or respected property rights, just a negotiated border, yet we can still apply the Coase method: families pay each other to respect the border. This does require some method of credible precommitment (though iteration can largely substitute for that), and an ability to not “pay” if one family outright invades, but it doesn’t seem to require any property rights other than the ability to hide one’s own money.
In a 2 player dollar auction, I can offer you 50c not to bid, and then bid 50c myself. If you outbid me with 51c, then you only gain 49c.
For this to work, we need trust that I will pay you iff you don’t bid. Either I pay you early, and then trust you not to bid, or you don’t bid, and trust me to pay later, or we both trust an escrow.
Coase theorem doesn’t hold if either family would take the money, and then try to move the river anyway.
This is a great comment. It made me realize that Coase can be applied to a dollar auction, which is really neat.
Let’s unpack that.
In the dam story, a Coase theorem solution would mean that each family pays the other to not build dams (since building a dam imposes an externality on the other family). In principle, this could work out to net-zero cash changing hands, since each family pays the other. It would just fix the incentives. So yeah, that does sound like a pretty good and feasible solution in the two-player case.
The usual failure mode of the Coase theorem is that it requires too much coordination when in many-player scenarios, so what would that look like? One generalization is to apply Coase directly to the prototypical all-pay auction: the dollar auction, an all-pay auction in which one dollar is auctioned off. Bidding in the dollar auction imposes an externality on the other bidders—they effectively lose their bid amount. Coase says that bidders can solve this by paying other players to not bid. In a many-player scenario, it won’t make sense for any one player to pay the others enough to stop bidding (e.g. with 100 bidders in an all-pay auction, I’ll want to pay the other bidders at most ~1 cent). If many players each offer to pay all the other players to stop bidding, then it can work, but that also creates a potential free-rider problem and coordination will be hard with so many people.
What rent?
The rent-seeking is all the efforts to build the dams that exceed the benefits of getting the additional territory. Using rent-seeking in a very broad sense a al political economy/public choice literature. Clearly there is some type of benefit each side gets from increasing their territories—that would be the rent they expect to collect by having ownership of the additional territory.
Each side if paying more to move the property line (reassign the property right to come area) than they are getting from actually owning the land. This occurs after they have already agreed on an allocation of property rights. Per Coase, all the remaining adjustments would then be payments by one side to the other for access/use or ownership. But why would they respect the allocation of rights by Coase more than the allocation they agreed among themselves?
Coase either needs Leviathan or a well shared and respected view of property rights. This last point seems a bit similar to a critique I heard James Buchannan made of David Friedman’s Machinery of Freedom thesis. That is, the theory fails if all protection agencies do not hold the same fundamental understanding of property rights. Perhaps that same problem plagues Coase in this type of setting. In other words, Coase requires a shared property rights regime that is generally accepted, as is the external enforcement of those rights by outside parties. I had never real considered that type of constraint on Coase before.
Do you have some pointers to the many-player problem you mention—hopefully not too mathy or with a good verbal summary of the argument. Or is what I’ve just “discovered” the general thrust of that problem?
I picked up my understanding of Coase from Law’s Order.
This seems wrong. Even in the example at hand (i.e. the dams), there’s no Leviathan or respected property rights, just a negotiated border, yet we can still apply the Coase method: families pay each other to respect the border. This does require some method of credible precommitment (though iteration can largely substitute for that), and an ability to not “pay” if one family outright invades, but it doesn’t seem to require any property rights other than the ability to hide one’s own money.
In a 2 player dollar auction, I can offer you 50c not to bid, and then bid 50c myself. If you outbid me with 51c, then you only gain 49c.
For this to work, we need trust that I will pay you iff you don’t bid. Either I pay you early, and then trust you not to bid, or you don’t bid, and trust me to pay later, or we both trust an escrow.
Coase theorem doesn’t hold if either family would take the money, and then try to move the river anyway.