by Beware of the Coase theorem! Willingness to walk away from an ‘unfair’ offer is [one] reason why the predictions of the Coase theorem often fail. I had discovered this firsthand many years earlier in Rochester. Our home there had a willow tree in the backyard … The neighbor hated that tree. He asked me to have the tree removed … I knew the Coase theorem … So I went to talk to my neighbor and told him that, while the tree did not bother me, if he felt strongly about it, I would let him arrange to remove it at his own expense. He thought this was the most outrageous suggestion he ever heard, slammed the door in my face, and never broached the subject again. When people are given what they consider to be unfair offers, they can get angry enough to punish
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Beware of the Coase theorem!
Willingness to walk away from an ‘unfair’ offer is [one] reason why the predictions of the Coase theorem often fail. I had discovered this firsthand many years earlier in Rochester. Our home there had a willow tree in the backyard … The neighbor hated that tree. He asked me to have the tree removed …
I knew the Coase theorem … So I went to talk to my neighbor and told him that, while the tree did not bother me, if he felt strongly about it, I would let him arrange to remove it at his own expense. He thought this was the most outrageous suggestion he ever heard, slammed the door in my face, and never broached the subject again.
When people are given what they consider to be unfair offers, they can get angry enough to punish the other party, even at some cost to themselves. That is the basic lesson of the Ultimatum Game. As the willow tree story illustrates, the same can occur in situations in which the Coase theorem is often applied.