Working Papers in Economics,
University of Gothenburg, Department of Economics

Abstract: The recent approach ‘subgame consistency’ in cooperative stochastic differential games by Yeung and Petrosjan (2006) and Yeung and Petrosjan (2004) is applied to the classical Coase theorem in the presence of stochastic stock externalities. The dynamic Coasean bargaining solution is identified involving a negotiated plan of externality trade over time as well as subgame consistent Coasean liability payments flow under different assignments of property rights. The agent with the right to determine the externality has the advantage to choose his own private equilibrium as the initial condition in the dynamic system of the Coasean bargaining solution. The dynamic Coasean bargaining solution is formulated followed by an illustration showing an analytical tractable solution.

Keywords: dynamic cooperative games; cooperative stochastic differential games; dynamic stability; Coase theorem

JEL-codes: C71; C73; Q53; Q56

24 pages, September 26, 2006

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