Coasean Markets

Coase’s work emphasized the economic importance of very small markets and made a new, more marginalist form of economic “institutionalism” acceptable within mainstream economics. A Coasean market is an association of persons with competing claims on a legal entitlement that can be traded. The boundaries of both Coasean markets and Coasean firms are determined by measuring not only the costs of bargaining but also the absolute costs of moving resources from one place to another. The boundaries of a Coasean market, just as those of the Coasean business firm, are defined by the line where the marginal cost of reaching a value-maximizing bargain by trading inside just equals the marginal cost of going outside. This focus on very small markets is a defining characteristic of modern Transaction Cost Economics. In analyzing such markets Coase ignored the eclectic, historical and behaviorist approach of the old institutionalists and applied the greater formalism and of marginal analysis. In the process, however, Coase assumed away important issues that the first generation of institutionalists were trying to address and created some new ones, such as how equilibrium is attained in Coasean as opposed to neoclassical markets. The most important difference between the two is that a Coasean market requires the unanimous consent of all participants before a trade can be made -- a condition imposed by Coase's own requirement of reciprocity, developed in The Problem of Social Cost (1960). The equilibrium problem is substantial but its significance has not been sufficiently developed. As a result, Coasean analysis of the business firm has made much more progress than has Cosean analysis of markets for legal entitlements. Further, the superiority of private governance over legislation, an important attribute of Coase’s argument, loses much of its force as the number of participants in Coasean markets increases beyond two. Research on the management of commons resources has contributed greatly to our understanding of when private resource allocation decisions by larger groups of owners succeed and when they fail. While not all common resources markets are of the kind contemplated by Coase they share many relevant characteristics. Further, the economic literature on private governance arrangements for the commons has found it necessary to step beyond the strict marginalist methodologies of Coasean economics and look more broadly to the historical, biological and social motivations for human cooperation