Institutional Change and Factor Movement: A Test of the Coase Theorem's Invariance Principle

The strong version of the Coase Theorem suggests that in the absence of transactions costs, the distribution of resources is invariant to the assignment of the rights to those resources. While the theoretical work that underlies the Theorem is vast, the empirical work is less available. The obvious reason being the difficulty in finding real world examples of markets that have experienced "rights" changes. Such a change however has occurred in Major League Baseball. Starting in the late 1970s the "rights" of players were switched from owners to players. This allows us to examine if the distribution of players was impacted by the change. If players switched teams more or less at the same rate before and after the introduction of free agency, this would support the Coase Theorem. In the end, the characteristics of player movement do appear to have been impacted by the re-assignment of rights and therefore are inconsistent with the predictions of the strong version of the Coase Theorem.