Coase theorem, complexity and transaction costs

This paper, by introducing complexity considerations, provides a dynamic foundation for the Coase theorem and highlights the role of transaction costs in generating inefficient bargaining/negotiation outcomes. We show, when the players have a preference for less complex strategies, the Coase theorem holds in negotiation models with repeated surplus and endogenous disagreement payoffs if and only if there are no transaction costs. Specifically, complexity considerations select only efficient equilibria in these models without transaction costs while every equilibrium induces perpetual disagreement and inefficiency with transaction costs. We also show the latter is true in the Rubinstein bargaining model with transaction costs.