Experimental Tests of Core Theory and the Coase Theorem: Inefficiency and Cycling

Abstract

We examine experimentally the bargaining process and the final allocation of payoffs in games that differ in terms of whether or not the core exists and in the initial allocation of property rights among the players. The paper highlights the interaction between property rights, transaction costs and the empty core. Our experimental results indicate that the existence of the core is an important determinant of bargaining generally and the Coase Theorem in particular. They confirm our conjecture that when the core is empty and property rights are ill defined, Coasian efficiency breaks down. Among other results, our experiments show that the number of inefficient (non-Pareto Optimal) agreements and bargaining rounds with cycling are significantly greater when the core is empty than when the core exists, especially when property rights are ill-defined. Our results suggest an economic role for specific property right arrangements to resolve the empty core.

Keywords: Coase Theorem, empty core, property rights, experimental

JEL Classification: C71, C91, D62, K10, K12, M10