Does voluntary participation undermine the Coase Theorem?

Abstract

The Coase Theorem states that costless enforcement of voluntary agreements yields efficient outcomes. We argue that previous treatments fail to recognize the full meaning of ‘voluntary’. It requires a two-stage game: a non-cooperative participation decision, followed by Coaseian bargaining only among those who choose to participate. We illustrate this in a simple public-goods model, and find outcomes ranging from extremely inefficient to fully efficient. However, the efficient equilibrium is not robust to even very small transaction costs. Thus, we cast doubt on Coaseian claims of universal efficiency. Finally, we outline a kind of coercion that restores efficiency.