Working Paper: CEPR ID: DP4263
Authors: Stephanie Rosenkranz; Patrick Schmitz
Abstract: The fact that according to the celebrated Coase theorem rational parties always try to exploit all gains from trade is usually taken as an argument against the necessity of government intervention through Pigouvian taxation in order to correct externalities. We show that the hold-up problem, which occurs if non-verifiable investments have external effects and parties cannot be prevented from always trying to exploit all gains from trade, may in fact be solved by taxation. Thus, in our framework Coasean bargaining is not a substitute for Pigouvian taxation; instead it is the very reason for government intervention.
Keywords: bargaining; contracts; externalities; holdup problems; taxation
JEL Codes: D62; H21; H23; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Coasean bargaining (C78) | Pigouvian taxation (H23) |
| holdup problem (D86) | Pigouvian taxation (H23) |
| unverifiable investments (G19) | Pigouvian taxation (H23) |
| Pigouvian taxation (H23) | socially efficient outcomes (D61) |
| Pigouvian taxation (H23) | producer effort (D20) |