Costly enforcement of property rights and the Coase theorem

Abstract

We examine a setting in which property rights are initially ambiguously defined. Whether the parties go to court to remove the ambiguity or bargain and settle before or after trial, they incur enforcement costs. When the parties bargain, a version of the Coase theorem holds. However, despite the additional costs of going to court, other ex-post inefficiencies, and the absence of incomplete information, going to court may ex-ante Pareto dominate settling out of court. This is especially true in dynamic settings, where obtaining a court decision today saves on future enforcement costs. When the parties do not negotiate and go to court, a simple rule for the initial ambiguous assignment of property rights maximizes net surplus.