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 25: The empirical accuracy and judicial use of the Coase Theorem (vel non)

Ward Farnsworth


The aim of this chapter is to comment on two “real world” aspects of the Coase Theorem: what we know about its empirical accuracy, and whether the Theorem has influenced the courts. The Coase Theorem is hard to test because it is hard to define. Coase didn’t offer any theorem in The Problem of Social Cost (Coase 1960); those who speak of the “Coase Theorem” are summing up an implication of Coase’s argument, and they don’t always do it the same way. Legal analysts tend to state the Coase Theorem roughly like this: if transaction costs were zero, assignments of rights by the law would not affect where the rights end up and how they are used, and the final allocation of them would always be efficient. The party ready to pay the most for a right would always obtain it, either by receiving it directly from the legal system or buying it from someone who did. When stated in that way, the Coase Theorem might seem to have empirical content in theory but be impossible to test in practice. The world of zero transaction costs belongs to science fiction; bargaining in real life always takes at least a little trouble. But the Theorem also can be stated as the more practical claim that at least when bargaining is easy, we can typically expect parties to negotiate their way to the same result no matter what the law says.

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