The empty core in the Coase theorem: a critical assessment

The purpose of this paper is to give some insights about the debate between Aivazian and Callen (1981, 2003) and Coase (1981) regarding the empty core problem. In particular our analysis concerns the role played by transaction costs in the debate. By maintaining the Aivazian-Callen transaction cost structure, we introduce in the analysis the new category “transaction costs in changing the state†which is linked to reputation and which may occur in situations of endless bargain. We argue, under our particular assumptions, that although Aivazian and Callen (2003) analysis is correct, Coase's intuition regarding the relationship between transaction costs and the empty core (Coase 1981) may be supported within Aivazian and Callen (2003) framework, if we introduce reputational concerns.