INCENTIVE-COMPATIBILITY AND COASEAN INVARIANCE IN PROPERTY AFFAIRS
INCENTIVE-COMPATIBILITY AND COASEAN INVARIANCE IN PROPERTY AFFAIRS

Summary/Abstract: We make an attempt to broaden the Coase invariance theorem by including asymmetry of information. Given the probability distributions of strong and weak types of property-disputing parties, we show how incentive-compatible legal rules may be constructed to eliminate adverse selection and moral hazard. The modified theorem we propose may be stated as follows: when transaction costs (such as search costs, bargaining costs and enforcement costs) are zero, incentive-compatible deals, mediated by the legal system, give rise to efficient allocation of resources, irrespective of the legal assignment of property rights. Additionally, we review the Coasean underpinnings of basic property law as it relates to externalities and pollution permits. We conclude with a discussion on possible negatives associated with the property tax and the lack of secure property titles in developing nations.

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