The impacts of costly appropriation of property rights and non-zero transaction costs on Coasean bargaining

The Coase theorem suggests that given well-defined property rights and zero transaction cost, agents can negotiate to efficient allocations of resources. In many real life situations, both of these assumptions do not hold. As a result, it is reasonable to believe that agents have to expend costly efforts to acquire the property rights and pay transaction costs associated with negotiations. This thesis investigates the impacts of costly appropriation of property rights and non-zero transaction costs on Coasean bargaining. To pursuit this goal, we propose a two-stage model. In this theoretical model, two agents are given opportunities to put efforts to compete for the property rights. The appropriation of property right is modelled by a Tullock contest and a first price all pay auction. The property right is assigned to the winner of the contest. Once the property right is defined, agents are allowed negotiate with each other and transfer payoffs between themselves. There are transaction costs associated with negotiations. Transaction costs are allowed to depend on the ownership of property rights and vary across agents. This theoretical model is then tested in an experiment. The design of our experiment follows closely the structure of our theoretical model. Overall, our theoretical results and our experimental results agree on the negative impacts of the transaction costs on efficiency but disagree on the impacts of the costly appropriation of property rights. While our theoretical results suggest that costly appropriation of property rights does not have any impact on the efficiency, our experimental results show the opposite.