Friday, July 7, 2006 - The Progress & Freedom Foundation Blog

Coase, Property Rights, Regulation and Rentseeking

Among the corollaries that fall out of the Coase Theorem is that, when property rights are ill-defined or uncertain, commercial transactions cannot take place because no party know what they own and the price system cannot function. It also follows from this corollary that parties will spend a great deal of time, money and effort to define property rights, inevitably in their favor. This modest point came to me last week while reviewing Jim's POP on the fight between cable and content companies over the extent of the Sony fair use principle and it applicability to head-end DVR-like technology.
But it is also a broader point that encompasses many of the current regulatory battles: uncertain property rights preclude private bargaining, but also inspire intense (and socially wasteful) amounts of rentseeking to define the property right. This is net neutrality, this is fair use, it is must carry, this was the unbundling fight surrounding the '96 Act. it is the intercarrier compensation debate; heck, it is a reductive tour de force of all regulatory behavior in the digital space. If property rights are ill-defined, or can be relatively easily re-defined, then parties will invest in getting the government to make these changes.
In the Cablevision case, the "fair use" principle precludes content and cable companies from quickly reaching a licensing deal for this admittedly new way to package and time shift content. In a Coaseian world, if one or the other party had a clear property right, a deal would quickly be struck. (For now, nevermind the productive effects.)

Likewise, net neutrality is an attempt to limit the broadband providers' rights for the benefit of applications companies. With property rights unclear, no commercial accomodations can be made, but certainly much investment must go into the task of defining the rights.
Of course, the Coase Theorem is notably agnostic about distributional consequences of its inexorable logic. It follows then that many sincere advocates for, say, expanded "fair use" exceptions to copyright and net neutralists support these changes on explicitly distributive grounds, usually giving their arguments a small-d democratic, egalitarian gloss. Indeed, the more ardent are whole-hearted neo-Rousseauians, complete with the romanticism and totalitarian impulses of those who believe that "man was born free, but everywhere he is in chains" [and the Internet, properly regulated and normed, can change that back again.] Nevertheless, the fundamental regulatory issues of the day involve poorly defined property rights, and the political efforts to gain more certain, clear rights.

posted by Ray Gifford @ 1:36 AM | Cable , Digital TV , Economics , IP , Innovation , Mass Media , Net Neutrality