Money, Banks and Finance in Economic Thought

“Failure to Appear”: The Use of the Coase Theorem in Judicial Opinions

Medema Steven, University of Colorado Denver

The Coase theorem is both the most referenced of the many famous theorems in economics and the foundation for the modern economic analysis of law. Its demonstration that, under certain assumed conditions, agents will bargain to an efficient and invariant allocative outcome provides the rationale for the very existence of the economic analysis of law, which is premised on the failure of real-world conditions to fully satisfy the theorem’s assumptions. But the Coase theorem has also been given a normative thrust. It has been used as a basis for the claim that agents can be relied upon to engage in post-trial bargaining when transaction costs are low and the initial placement of rights is inefficient, as a grounding for the judicial application of the efficiency criterion in legal decision making, and as the basis for a claim that legal rules should attempt to minimize the costs of transacting so as to facilitate post-trial bargains. This paper examines the question of how these normative uses laid onto the Coase theorem have influenced legal decision making through an analysis of the theorem’s use in judicial opinions in the United States. Given the theorem’s centrality in the economic analysis of law and this field’s profound influence on legal thinking over the last forty years, one might expect that the theorem is widely cited in judicial opinions, particularly given the copious referencing practices that these opinions reflect. But such is not the case. The theorem has been cited in only 30 judicial opinions in U.S. Federal and State Courts. This paper examines how the Coase theorem has been used by judges in these opinions, and by whom, and attempts to address the question of why it features so rarely in the adjudication process.

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Keywords: Coase theorem, Judicial opinions, Law and Economics