Experimental Evaluation of the Coase Theorem

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Abstract
THE Coase Theorem is a theoretical proposition describing the out- comes of mutually advantageous bargains in the face of the generation of an externality. The traditional Coasian framework is summarized in the set of assumptions adopted by Hoffman and Spitzer in their behavioral evaluation of the Theorem: "(a) two agents to each externality (and bar- gain), (b) perfect knowledge of one another's (convex) production and profit or utility functions, (c) competitive markets, (d) zero transactions costs, (e) costless court system, (f) profit-maximizing producers and ex- pected utility-maximizing consumers, (g) no wealth effects, (h) agents will strike mutually advantageous bargains in the absence of transactions costs."' The Coase Theorem is generally stated in terms of the neutrality of the resulting level of the externality to the initial assignment of property rights between the two parties. That is, irrespective of which party has the unilateral property right (UPR) to impose the externality on the other party, we should find the Pareto-optimal level of externality generation. The compelling feature of this Coasian result is that it is brought about by the self-interest of each party and does not rely on their altruism with respect to one another or the visible hand of the state. In an important study, Hoffman and Spitzer provide an experimental evaluation of the behavioral relevance of the Coase Theorem.2 They claim

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