Hovenkamp on Coasean Markets

Coasean Markets is a new paper by Herbert J. Hovenkamp, University of Iowa - College of Law. Here's the abstract:

Coase’s work emphasized the economic importance of very small markets and made a new, more marginalist form of economic “institutionalism” acceptable within mainstream economics. A Coasean market is an association of persons with competing claims on a legal entitlement that can be traded. The boundaries of a Coasean market, just as those of the Coasean business firm, are defined by the line where the marginal cost of reaching a value-maximizing bargain by trading inside just equals the marginal cost of going outside. In analyzing such markets Coase replaced the eclectic, historical and behaviorist approach of the old institutionalists with greater formalism and more of the rigor of marginalist analysis. In the process, however, Coase assumed away important issues that the first generation of institutionalists were trying to address and created some new ones, such as how equilibrium is to be attained in Coasean as opposed to neoclassical markets. The equilibrium problem is substantial but its significance has not been sufficiently developed. As a result, Coasean analysis of the business firm has made much more progress than has Cosean analysis of markets for legal entitlements, which were the subject of The Problem of Social Cost. Further, the superiority of private governance over legislation, an important attribute of Coase’s argument, loses much of its force as the number of participants in Coasean markets increases beyond two.

By contrast, the work on management of commons resources, in particular that of Elinor Ostrom, has contributed greatly to our understanding of when resource allocation decisions by larger groups of owners succeed and when they fail. While not all common resources markets are of the kind contemplated by Coase they share many relevant characteristics. Further, the economic literature on private governance arrangements for the commons has found it necessary to step beyond the strict marginalist methodologies of Coasean economics and look more broadly to the historical, biological and social motivations for human cooperation. The result has been to bring back many of the behavioral and value assumptions that characterized the first generation of economic institutionalists.