Working Paper No. 01-13:
The Asymmetric Coase Theorem: Dual Remedies for Unified Property

Author(s):

Francesco Parisi

Date Posted: 2001

Availability:
Abstract (below)
Full text (original)   PDF file

Abstract:

This paper builds upon the existing literature on non-conforming property rights, suggesting that property is affected by a one-directional bias leading towards increasing fragmentation. This bias is the result of asymmetric transaction and strategic costs. In this context, the paper offers a revised formulation of the normative Coase theorem to define more precisely optimal remedies in situations characterized by asymmetric transaction and strategic costs. I formulate an efficiency hypothesis, suggesting that courts and legislators consider the asymmetric effects of property fragmentation when choosing among alternative legal remedies. This framework further explains some of the apparent anomalies in the comparative law of remedies.

Property division creates asymmetric transaction costs: unlike ordinary transfers of rights from one individual to another, reunifying fragmented property rights usually involves transaction and strategic costs higher than those incurred in the original deal (Parisi, Schulz and Depoorter, 2000). Such costs increase monotonically with the extent of fragmentation. In the realm of non-conforming property arrangements, this monotonicity generates a one-directional stickiness in the transfer of legal entitlements. Even reversing a simple property transaction can result in monopoly pricing by the buyer-turned-seller; reunifying property that has been split among multiple parties engenders even higher costs given the increased difficulty of coordination among the parties and the increased opportunity for strategic pricing by the multiple sellers.

This paper revisits the normative implications of the Coase theorem and considers the choice of optimal rules and remedies in the presence of asymmetric transaction costs.