Whose Theorem Is It Anyways?

Changing property rights alters the owners of property, and thus who gets paid when property gets exchanged (as long as negotiation is costless).  The change does not affect their most-valued use and, thus, where they end up.   

Suppose Alex has a bike.  Jared is Alex's baby brother and he likes the bike a little more than Alex.  Dominick is a boy next door.  Dominick loves the bike more than Alex or Jared and has sufficient resources to compensate either boy.  Since Alex owns the bike, Dominick must negotiate with Alex to get the bike and, when exchanged, Alex gets paid.

But if Alex gives his baby brother the bike as a hand-me down, transferring the property right to Jared, then Dominick has to negotiate with Jared and Jared gets the big bucks if he sells the bike toDominick.  In either case, we expect Dominick to get the bike.  The only thing that changes is who gets paid.

I refer not to what is commonly-called the "Coase Theorem" but to Simon Rottenberg's "Invariance Hypothesis" from his seminal 1956 Journal of Political Economy article "The Baseball Players' Labor Market, published fully four years before Coase's "Problem of Social Cost."  Coase got the Nobel Prize.  Rotteberg has relative obscurity.  I previously wrote this post on the subject and this post which touched on the subject.  Here's another take on the subject:

What became known as the Coase Theorem was actually articulated by George Stigler, a point Coase made in his lecture accepting the Nobel Prize.  Stigler, who was awarded the Nobel Prize in 1982 - although not for articulating the Coase Theorem - offered the following definition of the Coase theorem:  When there are no transaction costs the assignment of legal rights has no effect upon the allocation of resources among economic enterprises.

For non-economists, Stigler's statement of the Coase Theorem may not be clear.  In fact, this entire story may be a bit confusing.  Coase receives a Nobel for not quite saying something clearly articulated by Stigler years after Rottenberg made a similar observation.  Certainly a puzzle, but what exactly does all this have to do with baseball?  To further clarify the Coase Theorem, let's return to the wisdom of Rottenberg.  This is the statement he made in 1956:  "It seems, indeed, to be true that a market in which freedom is limited by a reserve rule such as that which now governs the baseball labor market distributes players among teams about as a free market would (p. 255).

...When we look at the Coase Theorem, as stated by Stigler, and the Rottenberg Invariance Principle, as stated by (Rodney) Fort, we fail to see a significant difference.  It looks like Rottenberg - or Fort - is making the same observation that Coase - or Stigler - made.  Rottenberg is arguing that whether there is a reserve clause or complete free agency, the distribution of players in the league would still be the same, which we think is the same as saying the assignment of legal rights has no impact on resource allocation.  Rottenberg, though, did not receive a Nobel Prize for his work.  Perhaps this is because the example gave to illustrate his work inf loved a simple farmer and rancher.  Rottenberg, on the other hand, was talking about the game of baseball.  SO maybe many economists don't like baseball.  Or maybe many economists just dream about someday being a farmer or a cowboy.  When all is said and done, we are not really sure why Rottenberg's work has not received wider acclaim among economists.

That's from Wages of Wins by economists David Berri, Martin Schmidt, and Stacey Brook, a serious and readable look at various issues in Sports Economics, and with many tongue-in-cheek digs at academic economics and economists.  I hope to have a short review of the book after I finish it.  If the last few chapters are as interesting and readable as the first 5, Mssr.'s Berri, Schmidt, and Brook will have another positive review on their hands?*

*Are there diminishing returns to positive book reviews?  Probably, but I doubt returns could ever be negative.

Addendum: Bill Polley forwards the following link to an article written by Deidre McCloskey - Other Things Equal:  The So-Called Coase Theorem.  A snippet:

The "Coase" theorem as advertised by George Stigler or sneered at by Paul Samuelson is actually Adam Smith's theorem [1776]. It is wholly explicit in F. Y. Edgeworth [1881, 30ff, 114]; and with all the bells and whistles in Arrow and Debreu [1954]. Smith, Edgeworth, Arrow, Debreu, with many others, noted that an item gravitates by exchange into the hands of the person who values it the most, if transactions costs (such as the cost of transportation) are not too high. Why a student of economic thought like Stigler would call this oldest idea in economics "remarkable" I do not know, though as I say it is not the only strange reading that Stigler gave. Applying it to pollution rights is unremarkable. Where's the theorem?

Addendum part deux:  I am not ashamed to say I had not heard of this article before Bill sent me the link.  But this is one of the great things about academic blogging:  the almost instant feedback I receive on writings that may never have seen the light of day - heck, that may have never made it out of my head - were it not for the blog.

Comments

[EclectEcon]

The resulting allocation won't necessarily be the same -- just efficient (unless income effects are zero). Think of ball players who won't play for Steinbrenner under free agency but had no choice under slavery. Think of Kirby Puckett foregoing a higher income to stay in Minnesota.