Tuesday, August 28, 2012

Is Ronald Coase a Euvoluntaryist? (Part 2 of 2)

In my last post, I discussed the advantages of consolidating legion euvoluntary trades into fewer voluntary exchanges within a firm with the end of eliminating wasteful bargaining sessions. In this post, I'd like to broaden the idea of bargaining consolidation to transactions that happen outside the firm. In our quest here at EE to envision a more euvoluntary world, we now consider whether Coase's other watershed paper, The Problem of Social Cost points us towards the euvoluntary end of the spectrum.

Many of you will be familiar with this paper already. It boasts close to 20,000 citations in the academic literature, probably hundreds of thousands more in graduate and undergraduate term papers. Despite being one of the cornerstones of modern economics, it suffers misinterpretations similar to distortions of Say's Law. The Problem of Social Cost is the origin of the famous "Coase Theorem". My best stab at describing Coase's arguments are as follows: because harm is reciprocal, part of the calculus for the assignment of rights over relief should include lowest-cost determination. Coase, with his background in law, motivated his ideas using vivid case examples. When I explain this to undergraduates, I like to use examples from my time in the Navy. Undergrads living in dorms can probably better relate to barracks life than to apothecaries or cattle rights of way.

My favorite examples are ones where no rights are established ex ante. Recall that emergent law and custom is vested in precedent. If you leave your coat draped across the back of a restaurant chair, we know from prior experience that this means we have a temporary claim over that seat. Quite a lot of civil interaction is suffused with tacit rules so long as the interactions are routine and well-ordered. We know not to jump the line at the grocery store, we know to hold the door open for pregnant women, and we know to take our hats off in church. Things change a little bit once we step out of a world filled with well-established priors. When I joined the Navy back in tumpety-tumpety-tumpety-three, I had fewer references for acceptable behavior in certain contexts than when I was a snotty high school kid. So, evidently, did some of the gentlemen with whom I shared living quarters. I will spare you the less-than-savory details, but I will say that there existed no well-established property rights over the condition of the shower drains nor were there rigorous norms about the range of acceptable activities conducted in their proximity. Note the reciprocal problem: if it's my own shower, I have full exclusion rights, so I'm free to obstruct the drain with whatever debris as pleases me. Note also the undefined property right: in some nebulous sense, the shower is "owned" by the US Navy, an intangible concept to junior enlisted personnel until it wears a uniform bearing an extra chevron or two. In those A-school barracks, there was no regular senior enlisted oversight the way there was in Boot Camp, so many of the young men took rather unfortunate liberties with some of the facilities. Coase might argue that the remedy for this state of affairs would be to synthesize a de jure owner to resolve the problem rather than having plaintiffs individually investigate and wrangle bargains haphazardly. In the case of befouled drains in open bay barracks, a novel remedy was public, collective shaming. Highly visible signs warning of the consequences of untoward showertime activities were posted throughout the building in public areas. The offending behavior promptly ceased.

The comfortable junction of Coase and the principles of euvoluntary exchange can be found in the first two conditions, conventional ownership and conventional capacity to exchange. Coase noted that when these elements exist and are well-defined, it's much easier to correct violations of the fourth condition, uncompensated externalities. Broadening the scope of ownership might plausibly increase the euvoluntary opportunities for trade and dispute resolution. A Coasean world tends towards greater euvoluntarity. A world that strips property rights from sovereign individuals (or groups, as keenly noted in the research projects of, eg, Elinor Ostrom) restricts the universe of peaceful collaboration and vests dispute resolution in the hands of third parties; parties who might plausibly be better employed in value-creating work elsewhere.

Questions for consideration:

  • The Coase Theorem is often caricatured as, "as long as transaction costs are zero, it doesn't matter who owns the property right, as the parties can bargain to the efficient outcome." What is wrong with this interpretation?
  • Empirically, how big do you reckon is the deadweight loss of poorly or inappropriately assigned property rights? Whose responsibility is it to correct errors in property rights assignment?
  • Under what conditions are property rights undesirable? In what ways might the Coase Theorem lead us away from euvoluntary outcomes?
  • The discovery process is an important aspect of rights assignment, but discovery is costly. Under what conditions might it be wise to revisit traditional rights assignment schema to update for changing states of the world? Think patent and copyright norms, tort procedures or liability rules. How might Coasean insights affect the criminal code?

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Do you have suggestions on where we could find more examples of this phenomenon?