Political Coase Theorem

Abstract

This article considers theapplicability of the Coase theorem (in bothits positive and normative formulations) tothe political market. The articleanalogizes the choice of decision rules inthe political market to the choice of legalrules in the traditional Coase theorem andfurther analogizes alternative initialcoalitions to the different initialallocations of entitlements considered byCoase (1960). On the basis of theseanalogies, the paper examines the relevance(or lack thereof) of alternative votingrules and initial coalitions on the finalpolitical outcome. The article furthershows that, if all voters are allowed toenter into Coasian bargaining over thepolicy outcome to be adopted by themajority coalition (i.e., if politicalbargains are possible and are enforceable),uniqueness and stability are obtained. Theanalysis of the axiomatic Nash bargainingequilibrium yields an interesting geometricintuition. If voters have similar utilityfunctions centered around different idealpolicy points, the Coasian bargaining willbe conducive to the ``center of mass'' of thepolicy space, which weighs the agents'preferences as revealed in the bargainingprocess. Such ideal equilibrium satisfiesmost criteria of social welfare. Thearticle concludes considering the variouspractical limits of this ideal politicalmarket, whenever collective action andagency problems affect the politicalbargaining in a representative or directdemocracy.

With all side payments prohibited,there is no assurance that collectiveaction will be taken in the most productiveway. (James M. Buchanan and Gordon Tullock, 1962)