The Coase Theorem and the empty core: Inspecting the entrails after four decades

Ronald Coase pioneered the transaction cost approach to the modern analysis of institutions, contracts, and property rights. We argue that core theory enhances Coase’s transaction cost approach by injecting considerations of coalition formation and stability into the analysis. Analysis of coalitional stability also provides additional insights regarding the nature of transaction costs and the efficiency of institutional arrangements when there are such costs. Overcoming the empty core is potentially an important function of contracts, institutions, and property rights. Empty cores complement transaction costs in rationalizing real-world institutional arrangements.