The coase theorem and real markets : an empirical analysis of negociations between waterworks and farmers in Denmark
Résumé
The Coase theorem states that parties involved in externality problems will negotiate until a Pareto-optimal level of the externality is reached provided that property rights are well defined and allocated. This result holds regardless of the initial allocation of property rights. However, the Coase theorem depends on a number of assumptions. Among these assumptions is perfect information about each other's payoff function, maximizing behavior and zero transaction costs. Experimental studies have been conducted to consider the effect of relaxing one or two of the assumptions. These studies show that the theorem may still holds when the assumptions are relaxed. However, an important question is if this conclusion also holds for real market transactions. That is the question examined in this paper. We consider results of Danish waterworks' attempts to establish voluntary cultivation agreements with Danish farmers. A survey of these negotiations show that the Coase theorem breaks down in the presence of imperfect information, non-maximizing behavior and transaction costs. Thus, contrary to experimental results the Coase theorem did not hold in practice when the basic assumptions were violated for the case of negotiations between Danish waterworks and farmers.