Coase argues that in a zero-transaction costs world the structure of property rights should have no effect on efficiency. In Discussion Paper No. 1196, Research Affiliate Philippe Jehiel and Benny Moldovanu consider a situation with few agents whose utilities are transferable. An indivisible good is to be consumed by one of the agents before some deadline. The consumer of the good imposes externalities on the other agents, in addition to the benefit enjoyed from consumption. When full commitments are possible, the resulting outcome is efficient irrespective of the identity of the owner; the analogue of the Coase Theorem. However, the optimal full-commitment contract may require that the owner, agent A, sells to agent C if agent B refuses to pay some transfer to agent A. The threats used in the optimal contract need not be credible, and the authors are interested in situations where the agents can only commit to the actions to be taken in the current stage. In such a non-commitment paradigm, the outcome may be inefficient when resales are not permitted.

The authors address the question of whether resale markets that allow for the (sequential) internalization of the external effects can replace contracts including commitments to future actions as a vehicle towards achieving efficiency. Secondly, does the identity of the original property right owner matter for the determination of the final consumer, and is the final outcome always socially optimal? With privatizations, the first question appears to have policy implications: If the initial structure of property rights is shown to have no effect on the efficiency of the final outcome, every form of privatization, whether through auctions or any other mechanism, is equivalent. The second question is central to assessing whether public intervention (on resale markets) is needed. In the paper's non-commitment set-up, the answers to the two questions differ from those in the zero-transaction costs world

Resale Markets and the Assignment of Property Right
Philippe Jehiel and Benny Moldovanu

Discussion Paper No. 1196, June 1995 (IO)