Why Not A Political Coase Theorem? Social Conflict, Commitment and Politics∗

Do societies choose inefficient policies and institutions, in contrast to what would be suggested by a reasoning extending the Coase Theorem to politics? Do societies choose inefficient policies and institutions because of differences in the beliefs and ideologies of their peoples or leaders? Or are inefficiencies in politics and economics the outcome of social and distributional conflicts? This paper discusses these various approaches to political economy, and develops the argument that there are strong empirical and theoretical grounds for believing that inefficient policies and institutions are prevalent, and that they are chosen because they serve the interests of politicians or social groups holding political power, at the expense of the society at large. At the center of the theoretical case are the commitment problems inherent in politics: parties holding political power cannot make commitments to bind their future actions because there is no outside agency with the coercive capacity to enforce such arrangements.