The Coase Theorem and the Power to Increase Transaction Costs

Abstract

The Coase Theorem maintains that in the absence of transaction costs, in Francesco Parisi's words, regardless of the initial allocation of property rights and choice of remedial protection, the market will determine ultimate allocations of legal entitlements, based on their relative value to different parties. The paper explores the consequences for Coase's Theorem when a party without the initial allocation of a property right can manipulate the transaction costs of the party with the initial allocation in asserting that right. A party wishing to obtain the ultimate entitlement may find it preferable not to purchase the entitlement but to increase the transaction costs faced by the party with the initial entitlement in asserting that entitlement. The paper uses the example of the sale of consumer financial information in connection with the Gramm-Leach-Bliley Act as a vehicle for showing that in some cases the power to manipulate transaction costs will not interfere with parties bargaining to reach the highest-valued use of property, but that in other cases it will. Indeed, in some circumstances, someone contracting with a party with the power to inflate transaction costs will be better off without the initial allocation of rights. The paper also provides other examples of inflated consumer transaction costs. Finally, it discusses how federal regulators have attempted to address the problem of inflated consumer transaction costs under Gramm-Leach-Bliley and suggests another solution to the problem.