Uncertain Property Rights and the Coase Theorem

Abstract

The Coase theorem states that, in the absence of transaction costs, the assignment of property rights does not affect resource allocation, and the allocation is Pareto optimal. The theorem also implies that the order in which parties settle in a given location does not affect resource allocation either. This article argues that Pareto optimality is not attained in a class of prevalent cases involving uncertain rights, risk aversion, and resource divisibility. Resolution of the uncertainty results in a Pareto improvement for all parties and in a different allocation of resources if wealth effects are significant. Further, the article argues that the order in which parties settle in a given location may affect resource allocation.