Where’s Coase? Transaction Costs Reduction or Rent-Seeking in Forming Institutions

Abstract

The arguments are from my recent volume for Cambridge University Press. I argue that property rights formation varies dramatically between the private and public sectors. In the private sector agents are motivated by transaction cost efficiencies in institutional arrangements. They are residual claimants to the net gains, generating efficiencies. These motives and outcomes, however, are different in public policy where agents are not direct residual claimants to transaction cost efficiencies. They do not hold tradable property rights to economic returns molded by policy. Agents (policians, lobbyists, and bureaucratic officials) capture policy-based rents that cannot be easily competed away. Accordingly, while institutional formation in the policy arena provides rents to key parties, it may or may not advance general welfare. I examine the timing of the literature associated with Coase, Williamson, North, Demsetz, and others and show how it molded understanding of private sector institutional change. These scholars, however, focused on private efficiency gains within firms and markets, rather than on the role of political exchange and rent-seeking. Coase’s arguments for mitigating externalities, a classic market failure, were an alternative to centralized prescriptive regulation. Although the 1960 paper is among the most cited economics papers, his framework has not been primary in any U.S. environmental law. In environmental legislation, rent-seeking behavior displaces economic property rights and market exchange. Policy-based rents include pecuniary competitive advantages, as well as nonpecuniary psychic or philosophically-desired goals, campaign contributions, reelection support, as well as agency mandates and budgets. Three major US environmental laws are examined: the Clean Air Act Amendments of 1970, 1977, and 1990; the Magnuson-Stevens Fishery Act of 1976; and the Endangered Species Act of 1973. Public goods may be provided inequitably at higher cost.