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The Elgar Companion to Law and Economics, Second Edition

Edited by Jürgen G. Backhaus

This thoroughly updated and revised edition of a popular and authoritative reference work introduces the reader to the major concepts and leading contributors in the field of law and economics. The Companion features accessible, informative and provocative entries on all the significant issues, and breaks new ground by bringing together widely dispersed yet theoretically congruent ideas.
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Chapter 1: Coase Theorem and Transaction Cost Economics in the Law

Francesco Parisi


Francesco Parisi1 This chapter discusses the pervasive methodological implications of Ronald H. Coase’s contribution to economics and the law. Coase’s reconceptualization of the firm as an institutional device to minimize transaction costs has triggered an entire field of research. The traditional view of production, where labour and capital are the primary inputs, is refocused and replaced by the important role of governance structures in firms. Similarly, Coase’s assertion that an initial assignment of property rights is often irrelevant to overall welfare has occasioned one of the most intense and fascinating debates in the history of legal and economic thought. In the following pages, I shall examine the state of legal and economic scholarship in the wake of Coase’s well-known methodological breakthroughs. Transaction costs and Coase’s theory of institutions In his classic 1937 paper, ‘The nature of the firm’, Coase developed an economic theory of the firm which laid the foundation for understanding a wide range of institutional and organizational structures.2 Coase’s pathbreaking insight was that the comparative costs of organizing transactions within firms, rather than through markets, are the main factors that explain the existence and evolution of firms.3 Likewise, the size and scope of firms is determined by the relative costs of accessing the market versus governing an organization at the various levels of production.4 A wide range of empirical and theoretical issues have arisen as a result of Coase’s contribution. The most significant extension of his 1937 work has been the application of the transaction cost hypothesis...

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