Coase's Work Research Articles

Ronald Coase's theory of the firm and the scope of economics

Abstract:Ronald Coase's work and its reception illustrate the significance – and the difficulty – of identifying problems and proposing solutions, which provides the theme of this paper. His theoretical innovation was not derived from economics, and seemed irrelevant to contemporary issues of economic theory and policy; only his much later perception of an apparently unrelated problem – the incoherent treatment of social cost as market failure – showed how the concept of transaction costs could illuminate two major areas of economics. The inadequate treatment by economists of the transaction costs of markets is linked to the neglect of processes, and especially the processes of organising the growth and use of knowledge – key concerns of Smith and Marshall. The curious relationship between Coase's explanation of firms and Austin Robinson's analysis of competitive industry leads to a reflection on the scarce resource of human cognition and the role (and fallibility) of institutions.

The Contribution and Intellectual Legacy of Ronald Coase (1910-2013)

Ronald Coase's work presents a continuing challenge to the established neoclassical paradigm. His incorporation of transactions cost into economic theory enables many questions of organisational structure to be addressed but also implies a world of continuing evolutionary change rather than static equilibrium. This article reviews some of Coase's most influential papers and considers their implications for the future of public policy and economic theory.

Understanding 'The Problem of Social Cost'

This paper examines the positions of Coase and Pigou in regard to the problem of external effects (externalities). Assessing their two most important works, it appears that Coase has a more relevant preference for an evaluation of total efficiency, while Pigou, with some exceptions, is convinced that it is almost always socially desirable to reach marginal efficiency through taxes or liability. It is interesting that the economist of Chicago, who has elaborated on the renowned theorem, thinks that is not desirable to reach efficiency at the margin every time, and that it is often preferable to evaluate the total, which indicates the solution that is more welfare enhancing. A certain confusion in the work of Coase is noticeable. On one hand he criticizes Pigou for statements regarding the social desirability of relocating some industries away from the towns, and on the other hand, he suggests solutions that give an absolute right for an activity that is incompatible with the activity of another subject. In this way he eliminates the possibility of having a solution that is in accordance with Coase’s idea, which stresses that any external effect is reciprocal: The adjective “reciprocal” means that a damage to Y is the consequence of limiting the activity of Y in order to allow the activity of X, and the opposite is also true: A benefit for Y causes a damage to X. Beyond this criticism, Coase’s arguments against Pigou’s tools are represented by the famous theorem, according to which a public intervention is not necessary in order to obtain efficiency when transaction costs are low. However, the theorem is not an idea that can be used to say that Pigou’s methods are useless when transaction costs are high. Indeed, when transaction costs are high, efficiency cannot be reached through negotiations. Coase, nonetheless, rejects Pigou’s tools for every situation. Through a deep examination of the paragraphs of “The Problem of Social Costs,” it is understandable why Coase opposes Pigou’s tools. First of all, he considers that the remedy consisting in the compensation of the victim. To Pigou’s way of thinking, this is a strict liability rule. Coase states that the damage is caused by both parties, and, moreover, the amount of the damage depends on both parties. He understands that the compensation method described by Pigou can bring about moral hazards and, therefore, brings about new social costs.Since the article was written in 1960, Coase’s theory has been developed and has become a pillar of tort law and economics. Pigou proposed a tax as an alternative remedy for external effects, which does not bring about a behavior of moral hazard, because the victim bears the expected costs. However, Coase is diffident in regard to the tax. His idea was not developed by other scholars in the subsequent years. Coase understands that efficiency should require a tax on the victim, so that the victim considers the increase of the costs of precaution for the injurer due to creating the nuisance. In other words, Coase understands that the tax does not produce the socially optimal activity level of the parties if the costs of precaution of the other party are not considered as a component of the tax. Therefore, Coase‘s belief is that the tools of Pigou create so many problems as to make them inefficient.

Regulation, trust, and cronyism in Middle Eastern societies: The simple economics of “wasta”

Despite being a fixture of everyday life in the Arab world, wasta, which may be thought of as special influence by members of the same group or tribe, has received little attention from social scientists. Our casual empiricism suggests that wasta is an important determinant of how economic activities are organized and resources are allocated in Middle Eastern societies, yet economists, even those who specialize in work related to the Middle East, have not addressed the issue of wasta. With this paper we provide a modest beginning to filling that void. Specifically, we use the history of wasta, Hayek's concept of extended order and Coase's work on the nature of the firm to draw inferences regarding the existence of wasta and its persistence in Arab societies.

Regulation, Trust, and Cronyism in Middle Eastern Societies: The Simple Economics of 'Wasta'

Despite being a fixture of everyday life in the Arab world, wasta, which may be thought of as special influence by members of the same group or tribe, has received little attention from social scientists. Our casual empiricism suggests that wasta is an important determinant of how economic activities are organized and resources are allocated in Middle Eastern societies, yet economists, even those who specialize in work related to the Middle East, have not addressed the issue of wasta. With this paper we provide a modest beginning to filling that void. Specifically, we use the history of wasta, Hayek's concept of extended order and Coase's work on the nature of the firm to draw inferences regarding the existence of wasta and its persistence in Arab societies.

A Case of Mistaken Identity: George Stigler, 'The Problem of Social Cost,' and the Coase Theorem

“The Problem of Social Cost” is rightly credited with helping to launch the economic analysis of law. George Stigler plays a central role in the professional receipt of Coase's work and, in particular, of the Coase theorem. While Coase's negotiation result was taken up in the scholarly literature not long after the publication of “The Problem of Social Cost,” it was Stigler who gave the theorem its name and introduced it to scores of readers in The Theory of Price (1966). His remaking of Coase's idea into a “theorem” had significant rhetorical force, which, combined with the challenge that it pose to received thinking about externality problems both lent credibility to the idea and made it a force to be reckoned with. The present paper analyzes Stigler's various commentaries on the Coase theorem with a view to getting at both how Stigler understood the theorem and its import and why he exhibited such a fascination with it over the last thirty years of his life.

Modularity in Technology, Organization, and Society

Modularity is a very general set of principles for managing complexity. By breaking up a complex system into discrete pieces--which can then communicate with one another only through standardized interfaces within a standardized architecture--one can eliminate what would otherwise be an unmanageable spaghetti tangle of systemic interconnections. Such ideas are not new in the literature of technological design, even if, as some claim, modularity is becoming more important today because of the increased complexity of modern technology. What is new is the application of the idea of modularity not only to technological design but also to organizational design. From another angle, however, the principles of modularity have an even longer pedigree in the social sciences. We can think of Adam Smith's obvious and simple system of natural liberty as among the earliest proposals for how a complex modern society might be made more productive through a modular design of social and economic institutions. In separating mine from thine, rights of private property modularize social interaction, which is then mediated through the interface of voluntary exchange, all under the governance of the systems architecture of common law. Despite its heavy emphasis on incentive issues, the economics of property rights that emerged from the work of Coase--in both its original form and its more formal recent incarnation--provides a good deal of material useful for understanding the nature and role of modularity in social institutions. This paper is an attempt to raid both the literature on modular design and the literature on property rights to create the outlines of a modularity theory of the firm. This theory will look at firms, and other organizations, in terms of the partitioning of rights--understood as protected spheres of authority--among cooperating parties. And it will assert that organizations reflect nonmodular structures, that is, structures in which decision rights, rights of alienation, and residual claims to income do not all reside in the same hands. The reasons behind alternative partitions are numerous and complex, however, calling for subtlety in the application of the idea of modularity to the firm.

History, markets, hierarchies and institutions

New institutional economies and the work of Coase, Williamson, North and others today occupies a central place in thinking about the nature of economic hierarchies institutions. This paper argues that it cannot offer a guide to history of the real development of markets, hierarchies and institutions. Those writers like MacIntyre and Sennett who focus on focus on social embedding and the potential conflict between pure markets and social cohesion offer a better basis for understanding of the real history of capitalism. But this approach too needs extending if it is to be a guide to the real history of markets, hierarchies and institutions.

What'd I Say?: Coase, Demsetz and the Unending Externality Debate

Economists study various problems referred to as - situations that, at least potentially, justify government intervention to solve them. Externalities (or costs) are viewed as perhaps the greatest market failure problems. externality issue has also occasioned much re-thinking of fundamental economic principles, particularly in the context of Ronald Coase's article on The Problem of Social Cost. Coase explained that externalities manifested a more fundamental issue in economics, the costs of transacting over rights to affect other's welfare. Following Coase's work, economists almost reflexively consider social costs problematic only when transaction costs are relatively high. Yet, Coase's analysis has resulted in much confusion, even disagreement. For example, Harold Demsetz has recently objected to aspects of the Coase approach, as a matter of both economics and of government policy. As economics, Demsetz says, Coase's focus on transactions costs is not helpful in resolving questions concerning externalities. Even if transaction costs were zero, externalities would still exist. Moreover, Demsetz objects that focus on transaction costs to explain persistent externalities furnishes spurious reasons for undesirable government intervention in markets. This paper summarizes and evaluates Demsetz objections, maintaining that Demsetz sometimes ignores points that Coase has made. At the same time, Demsetz adds new insights to the Coase Theorem.

Reassessing the fundamentals and beyond: Ronald Coase, the transaction cost and resource‐based theories of the firm and the institutional structure of production

AbstractIn this paper, three points are argued. The first is that Ronald Coase, best known as the forefather of transaction cost theory, foresaw many of the critical questions that proponents of the resource‐based view are concerned with today. The second is that resource‐based theory plays a potentially much more critical role in economic theory and in explaining the institutional structure of production than even many resource‐based scholars recognize. The last point is that a more complete understanding of the organization of economic activity requires a greater sensitivity to the interdependence of production and exchange relations. The arguments presented in this paper highlight important, but relatively ignored, elements in Coase's work that inform strategy research. More importantly, this paper makes the case for a triangular alignment between the triumvirate of governance structure, transaction, and resource attributes and demonstrates how the identity and strategy of a particular firm influences how its resources interact with the transaction and how the firm chooses to govern it. The general argument is then applied to the context of interfirm collaborative relations, where the key focus is broadened from just cost to also include skills/knowledge and the interdependence between cost and skills with respect to firm boundaries, both in terms of choice and nature. Such a broadening of focus enables us to additionally examine the transacting process as a productive endeavor, which underpins the co‐evolution of the competencies of partner firms. Copyright © 2002 John Wiley & Sons, Ltd.

Coase on broadcasting, advertising and policy

The initial argument developed in this paper is that a wants-based conception of the objectives of policy, clearly operative in his broadcasting studies, together with the acceptance of certain assumed properties of the competitive process, tightly constrain Coase's work. At times, for example, when considering the impact of advertising, Coase accepts that the assessment of policy must be carried out on a broader basis. Coase does not, however, go on to develop a criterion beyond wants. Elsewhere, he highlights the importance of the distinction between wants and needs. This paper further argues that, by elaborating upon this distinction, it becomes possible to give an indication of how a broader framework for the assessment of policy might be developed. Copyright 2001 by Oxford University Press.

Of Coase and Corn: A (Sort of) Defence of Private Nuisance

Drawing on the work of Coase, the essay argues for a reform of the law of nuisance based upon property rights rather than determinations of social welfare by the courts, and for the use of a reformed law of nuisance as the least flawed method of regulating the environment in many situations compared to other techniques of regulation. The argument is developed and illustrated by reference to several contemporary issues, including genetically modified crops.

The Property System in Austrian Economics: Ronald Coase's Contribution

This paper argues that contrary to Roy Cordato's claim, Ronald Coase's work on the “problem of social cost” is an important contribution to Austrian economics. Coase identified a criterion that can be used to establish initial legal rights to control actions that have external effects. In other words, he discovered a criterion that, in some cases, can be directly applied to help establish a property system when there is none. The criterion also helps a government adapt, or maintain, a property system in light of continuing changes that are characteristic of the entrepreneur economy. Cordato's anti-state ethical economics, which he used to criticize Coase, is a deviation from the century-old tradition of Austrian economics. Menger, Mises and Hayek saw economics as a body of logical knowledge that is value free. In addition they recognized a role for government in defining legal rights and in maintaining the property system in light of changing conditions. Accordingly, it is wrong to invoke “Austrian economics,” properly understood, to criticize this aspect of Coase's work. In this paper, I argue that Cordato has followed a deviant and troubling path by trying to construct an Austrian economics based on ethics, that he has failed to understand that a changeable property system is a prerequisite for the market economy, and that he has correspondingly failed to recognize Coase's contribution to the problem of how to maintain the property system in light of continuing change.

Evolutionary and competence‐based theories of the firm

This essay explores evolutionary and competence‐based theories of the firm. Evolutionary theories can be regarded as a subset of a wider class of theories, variously described as “capabilities”, “resource‐based”, or “competence‐based” theories of the firm. These contrast with a different set of contractarian theories, emanating largely from the work of Coase. It is argued that the contractarian theories of the firm misleadingly assume given individuals thus neglecting processes of individual learning and transformation. Similarly underestimated is importance of technology and the persistence of variety in firm structure and performance. The genesis of the alternative, competence‐based approach is outlined, including the important subset of “evolutionary” approaches of the Nelson‐Winter type. The paper concludes with a discussion of the relevance of the competence‐based approach to strategic management.

Incomplete Contracts and the Theory of the Firm

Nature of the Firm (together with Coase's later paper, Problem of Social Cost) has had an enormous influence on the development of research in the theory of organization, even if for a long time it was, in Coase's words, much cited and little used. The situation has changed in the last ten to fifteen years, however, with the publication of a number of contributions which have refined and extended Coase's ideas about the firm. My plan in this paper is to reflect on recent developments and to offer a perspective on where the field stands and also where it may be going. I will begin with a brief summary of the main ideas and issues as they have grown out of Coase's work.' I will then discuss how the firm as an institution can be thought of as arising from the incompleteness of contracts and the need to allocate residual control rights. Finally, I will return to a comparison of this view of the firm with others that have been advanced in the literature.

Environmental amenity rights, transactions costs, and technological change

A general equilibrium model incorporating transactions costs and technological change is developed and used to investigate society's preference for the assignment of property rights affecting pollution. In contrast to the work of Coase, it is shown that indifference to the legal structure is a special case. Major results include (1) the specification of conditions under which society prefers polluters to pay for damages rather than allowing negative externalities to continue unless the polluters are bribed and (2) the conclusion that societies experiencing technological change eventually prefer the legal structure under which polluters pay for damages.