About Ronald Coase and NIE

DAVID TOBN OROZCO

DEPARTMENT OF ECONOMICS-UNIVERSITY OF ANTIOQUIA

Nobel prize in economics (1991)

For his discovery and clarification of thesignificance of transaction costs and

property rights for the institutional structure

and functioning of the economy.

By means of a radical extension of

microeconomics.

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Transaction costs (TC) Why are there organizations of the type represented by firms and

why is each firm of a certain size?: TC vs. contract, administrativeand production costs within the firm.

TC: the costs we incur in making an economic exchange.

The firm in fact consists of this array of contracts and is related to therest of the world by other fully specified contracts regardingpurchases of inputs, sales of products, and loans under prescribedterms.

Every type of firm is comprised of a distinctive contract structure andthereby a specific distribution of rights and obligations (propertyrights).

The existence of firms, different corporate forms, variations incontract arrangements, the structure of the financial system andeven fundamental features of the legal system can be givenrelatively simple explanations by taking into account transactioncosts.

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Property rights

The power and precision of analysis may be enhanced if it is carried

out in terms of rights to use goods and factors of production instead of the goods and factors themselves.

Those are defined by defined by clauses in contracts, internal rules

in organizations and law.

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Property right and the problem of

social cost. Allocation of property rights by using markets: . it would be better if use

of the spectrum was determined by the pricing system and wasawarded to the highest bidder. This raised the question of what rightswould be acquired by the successful bidder and I went on to discussthe rationale of a property rights system. Part of my argument wasconsidered to be erroneous by a number of economists at the Universityof Chicago.

This apparent error was the seed of the problem of social cost: it isprobably the most widely cited article in the whole of the moderneconomic literature:

if a property right is well defined, if it can be transferred, and if the transaction costs in an agreement which transfers the right from one holder to another are zero, then the use of resources does not depend on whether the right was initially allotted to one party or

the other (STIGLER).

Market as has been analized by mainstream supposes: no transactionscosts and property rights well defined

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It is the fact that transaction costs are never zero which indeed

explains the institutional structure of the economy, includingvariations in contract forms and many kinds of legislation.

Economic institutions do not require a "separate" theory. It is

sufficient to render existing theory complete and formulate it in

terms of the primary components, i.e., property rights.

Courts probably try to distribute the rights among the parties so as to

realize the solution which would have been the outcome of an

agreement, if such an agreement had been possible. They serve asan extension of the market mechanism to areas where it cannot

function due to transaction costs.

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Other contributions

Public goods and public enterprise: post office, broadcasting,lighthouse.

The market for goods and the market for ideas.

The marginal cost controversy

The durability of monopoly

How China became capitalist (Coase-Wang)!: Chiuna has alwaysbeen a land of commerce and private entrepreneurship butembraced the institutions of a modern capitalist economy onlyafter one century and a half of self-doubt and self-denial.

China portrays a ruling class desperately seeking to stay afloat, even atthe price of watering down its own ideology.

(http://www.youtube.com/watch?v=zWUycRtsuHs)

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A new subject: Law and economics

As editor of the Journal of Law and Economics: I encouraged

economists and lawyers to write about the way in which actualmarkets operated and about how governments actually perform in

regulating or undertaking economic activities.

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Coase wanted to be a scholar of reality

Coase did not choose the approach of complicated

model-making, nor did he find delight in crunching

numbers.

He consistently studied markets for what they are, rather

than for what they might be.

In this sense, he is perhaps the most distinguished

contemporary disciple of Adam Smith.

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Coases Method

"As I see it, progress in understanding the working of the economic

system will come from an interplay between theory and empiricalwork. The theory suggests what empirical work might be fruitful,

the subsequent empirical work suggests what modification in the

theory or rethinking is needed, which in turn leads to new empirical

work. If rightly done, scientific research is a never-ending process,

but one that leads to greater understanding at each stage.

http://www.youtube.com/watch?v=04zFygmeCUA

Both the nature of firm and the social cost problem are derived from

empirical enquires: of studying both the North American structure of

production and public property and utilities.

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Coase and Buchanan

Buchanan

Employs the analytical framework of economics to explore the political

process and is one of the founders of public choice.

Leaning more toward the normative.

Coase

applies economic reasoning to examine legal cases and is one of the

founders of modern law and economics.

Toward the positive.

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Buchanams Critique obout Coase Theorem

With respect to assing property rights to the use of spectrum.

The Coase theorem is an insightful proposition about economic

activities, and Buchanans critique enriches it by emphasizing thesubjective nature of values.

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The problem of free right secession

In reality, there are very few constitutions that explicitly guarantee the free right ofsecession.

But: the economic literature has produced forceful arguments contending that theright to secede could be a useful disciplining device to prevent the exploitation ofa minority by a majority.

Buchanan specifically advocates the right of secession as a part of the EuropeanUnion's constitution (2003).

However Gradstein shows that granting this right may lead to political extortion by aregion considering secession. the region's voters may exploit the political process toelect decision makers who are less interested in sustaining a federation. Theseincentives to delegate decision-making powers may, in turn, lead to inefficientallocations.

Positive effects of integration: spillover of public goods. Coases theorem functionshere cause a compensatory transfer over the public good.

But with secession appear incentives to delegate political power to individuals witha low preference for the public good (making less attractive the public good andcreating a threat of secession). Then the possibility of efficient bargainingenvisioned by Coase are undermined.

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