Coase theorem, complexity and transaction costs

This paper, by introducing complexity considerations, provides a dynamic foundation for the Coase Theorem and highlights the role of transaction costs in generating inefficient outcomes in bargaining/negotiation. We show that, when the players have a preference for less complex strategies, the Coase Theorem is valid in negotiation models with repeated surplus and endogenous disagreement payoffs if and only if there are no transaction costs. Specifically, complexity considerations allow us to select only efficient equilibria in these models without transaction costs while in sharp contrast every equilibrium outcome induces perpetual disagreement and inefficiency with (arbitrarily small) transaction costs. We also show that the latter is true in the Rubinstein bargaining model with transaction costs. JEL Classification: C72, C78