The "problem" of people reclining their seats on airplanes has given rise to this wonderful piece by Virginia Postrel.
In it, she explains the Coase Theorem, the importance of the assumptions underlying the theorem, and how to deal with situations when the assumptions are not satisfied (which is what makes both the Coase Theorem and her article so good).
A lengthy excerpt:
Airline seats offer a perfect illustration of Ronald Coase’s famous analysis in his 1960 article, “The Problem of Social Cost.” Coase’s crucial insight was that the way we tend to think about unwanted spillovers misses half the story. “The question is commonly thought of as one in which A inflicts harm on B and what has to be decided is: how should we restrain A? But this is wrong,” he wrote. “We are dealing with a problem of a reciprocal nature. To avoid the harm to B would inflict harm on A. The real question that has to be decided is: should A be allowed to harm B or should B be allowed to harm A?”
The traditional sort of thinking leads people on both sides of the airline-seat debate to get self-righteous, arguing that legroom and the ability to work is more important than comfortably reclining, or vice versa. Each camp finds the other rude. Each camp wants to improve its situation by inflicting harm on the other. It’s a “problem of a reciprocal nature.”
Essentially, the recliner says, "there wouldn't be a problem if you weren't behind me or if you didn't care about my reclining." And the tray user says, "there wouldn't be a problem if you didn't recline."
But, as Josh Barro has observed, the airlines have clearly defined the property rights. Passenger A (the recliner) has the right to harm Passenger B (the unfortunate soul behind him). Citing a common simplification of Coase’s work, Barro claimed that “it doesn’t matter very much who is initially given a property right; so long as you clearly define it and transaction costs are low, people will trade the right so that it ends up in the hands of whoever values it most.” So, he argued, “If my reclining bothers you, you can pay me to stop.”
This solution, however, is highly unrealistic. It waves away the central theme running throughout Coase’s work: the problem of transaction costs. Making and enforcing contracts, Coase emphasized, isn’t free. And when it comes to airline seats, it’s a lot more costly than Barro admits.
In theory, I could have offered the guy in front of me money to sit up, but even assuming that my fractured Italian had been up to conducting the negotiations and that he wouldn’t have gotten nasty in response to my overtures, how would I have enforced the deal? It’s not a simple problem, and certainly not a cost-free one. Suggesting that as long as property rights are well-defined, you can simply make a deal misunderstands what Coase was all about. He was obsessed with transaction costs. They explain why we have institutions (including firms), not just individual bargains.
Let's face it: many, if not most, of us would find it extremely uncomfortable/bothersome/annoying/unpleasant to be bargaining with a stranger about the exchange of the right to lower or not to lower a seat on the plane. These psychological costs mean that otherwise value-maximizing transactions rarely occur. I cannot imagine offering $20 to the person in front of me if they won't recline. Nor can I imagine offering notto recline if they compensate me by $20. [or fifty dollars or whatever deal we might strike]. Negotiation and transaction costs are important, and hence the initial assignment of property rights (or legal entitlements in general) is also important.
Postrel notes that the airlines have the property rights and assigns them with the sale of tickets. She offers one solution that airlines might try, but commentors have offered others as well. Likely there is some scheme that could lead to more value for passengers (and hence for the airlines).
It is as if she read Coase, Demsetz, and Calabresi and folded them all into one nice exposition.
My own version of the Coase Theorem:
- If property rights (or more generally legal entitlements) are clearly defined and easily enforced, and
- If transaction and negotiation costs are low,
- Then resources will move to their most highly valued use regardless of the initial assignment of the legal entitlements.
The theorem itself is trivial and not much different from Adam Smith's "invisible hand". It becomes rich, however, in the consideration of its assumptions. And that is where Postrel's piece shines. It doesn't just look at Coase; it looks at the assumptions.