Chapter 1: Coase theorem and transaction cost economics in the law
Francesco Parisil This entry demonstrates the pervasive methodological implications of Ronald H. Coase’s contribution to economics and the law. Coase’s reconceptualization of the firm as an institutional device to minimize transaction costs has triggered an entire field of research. The traditional view of production, where labour and capital are the primary inputs, is refocused and replaced by the important role of governance structures in firms. Similarly, Coase’s assertion that an initial assignment of property rights is often irrelevant to overall welfare has occasioned one of the most intense and fascinating debates in the history of legal and economic thought. The following pages examine the state of legal and economic scholarship in the wake of Coase’s well-known methodologica1 breakthroughs. Transaction costs and Coase’s theory of institutions In his classic 1937 paper, ‘The Nature of the Firm’, Ronald Coase developed an economic theory of the firm which laid the foundation for understanding a wide range of institutional and organizational structures.2 Coases’s pathbreaking insight was that the comparative costs of organizing transactions within firms, rather than through markets, are the main factors that explain the existence and evolution of firms.3 Likewise, the size and scope of firms is determined by the relative costs of accessing the market versus governing an organization at the various scales of prod~ction.~ A wide range of empirical and theoretical issues have arisen as a result of Coase’s contribution. The most significant extension of Coase’s 1937 work has been the application of the transaction cost hypothesis to other...
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