On the Coase theorem and coalitional stability: The principle of equal relative concession

The Coase theorem is argued to be incompatible with bargaining set stabilit y due to a tension between the grand coalition and sub-coalitions. We provi de a counter-intuitive argument to demonstrate that the Coase theorem may b e in complete consonance with bargaining set stability. We establish that a n uncertainty concerning the formation of sub-coalitions will explain such compatibility: each agent fears that others may 'gang up' against him and t his fear forces the agents to negotiate. The grand coalition emerges from t he negotiations if each agent uses the principle of equal relative sacrific e to determine the actual allocation. We also establish the rational basis for the choice of the principle of equal relative concession by the negotia ting agents. Hence we argue that the Coase theorem will be valid even if th ere are stable sub-coalitions.