Initially contestable property rights and Coase: Evidence from the lab

Abstract

This article investigates how the existence of initially contestable property rights affects the efficiency of the Coase theorem. We design a two-stage experiment that incorporates a stage where property rights are initially allocated to participants followed by a stage that allows bargaining between participants. In stage one, participants endogenously choose rent-seeking effort (and thus the probability) to initially obtain property rights before entering an unstructured bargaining game. We find the presence of costly rent seeking to obtain the property rights makes it significantly less likely that the efficient outcome is reached. We introduce bargaining costs and find that allowing for symmetric bargaining costs has no impact on the likelihood of the efficient outcome being reached, whereas asymmetric bargaining costs – costs that differ if the player wins or loses the initial property rights – substantially reduces the likelihood of reaching an efficient outcome. Our analysis is applicable to contexts with initially contestable and tradable nature resource rights.