Property Rights and the Efficiency of Barganing

Property Rights and the Efficiency of Barganing

By
Ilya Segal, Michael D. Whinston
Journal of the European Economic Association. December
21, 2016, Vol. 14, Issue 6, Pages 1287-1328

We show that efficient bargaining is impossible for a wide class of economic settings and property rights. These settings are characterized by (i) the existence of “adverse efficient opt-out types”, whose participation does not change the efficient allocation and who, when they opt out, are the worst type other agents can face, and (ii) non-existence of the “marginal core”, and its multivaluedness with a positive probability. We also examine the optimal allocation of property rights within a given class that satisfies (i), such as simple property rights, liability rules, and dual-chooser rules. We characterize property rights that minimize the expected subsidy required to implement efficiency. With two agents, simple property rights that are optimal in this way maximize the expected surplus at the status quo allocation, but this no longer holds with more agents. We also study “second-best” budget-balanced bargaining under a liability rule. The optimal “second-best” liability rule may differ from, but is often close to, the expectation of the victim’s harm, which would be optimal if there were no bargaining. However, liability rules that are close to a simple property right result in a lower expected surplus than the simple property right they are near.