The Elgar Companion to Ronald H. Coase
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The Elgar Companion to Ronald H. Coase

Edited by Claude Ménard and Elodie Bertrand

Ronald H. Coase was one of the most innovative and provocative economists of the twentieth century. Besides his best known papers on ‘The Nature of the Firm’ and ‘The Problem of Social Cost’, he had a major role in the development of the field of law and economics, and made numerous influential contributions to topics including public utilities, regulation and the functioning of markets. In this comprehensive Companion, 31 leading economists, social scientists and legal scholars assess the impact of his work with particular reference to the research programs initiated, the influence on policymakers, and the challenge to conventional perspectives.
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Chapter 15: The Coase conjecture

Faruk Gul

Extract

In 1994, John F. Nash Jr, John C. Harsanyi and Reinhard Selten shared the Nobel Prize in Economics for their contributions to game theory. Together, these three researchers are identified with the three main ideas of game theory: Nash with equilibrium, Harsanyi with asymmetric information and Selten with subgame perfection. The first idea concerns the fundamental circularity of game-theoretic notions of equilibrium: in most strategic settings, the optimal action for one player depends on what she expects the other player to do. But the behavior of this other player depends on his expectation of the first player’s behavior. Thus, Nash’s contribution highlights the importance of expectations in the analysis of strategic behavior. The second idea, the one belonging to Harsanyi, asymmetric information, is the observation that behavior that seems deterministic or certain to one player because of her superior information, may seem random to her less informed opponent: for example, Firm 1 increases its output because its cost of production has decreased. But, Firm 2, without knowledge of the recent reduction in Firm 1’s cost of production, might view an increase in Firm 1’s output as uncertain and contingent on the unknown cost reduction.

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