Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade

Abstract

It is a common argument in law and economics that divided ownership can create or exacerbate strategic behavior. For instance, when several persons own the land designated for a proposed stadium, individual sellers may "hold out" for a disproportionate share of the gains from trade. Alternatively, when building a public library would benefit multiple residents, individual buyers may "free ride" on the willingness of others to pay for its construction. Such transaction costs of collective action fall under a variety of analytic rubrics, including the "tragedy of the commons" and the theory of "public goods." Nonetheless, each example of market failure shares a common attribute: The division of a single legal entitlement, or of rivalrous entitlements, among joint sellers or joint buyers may prevent socially efficient transactions, particularly when the parties possess private information about their preferences. This Article explores a different way of dividing an entitlement. Rather than analyzing divisions among buyers or among sellers, we consider the effects of splitting an entitlement between the two groups. Our core insight is Solomonic in character: Dividing a legal entitlement between rivalrous users can facilitate efficient trade. More specifically, we show that when two parties have private information about how much they value an entitlement, endowing each party with a partial claim to the entitlement can reduce the incentive to behave strategically during bargaining, thereby enhancing economic efficiency.