Ronald Coase

Ronald H. Coase was a British economist who spent most of his academic career at the University of Chicago Law School and is a founding figure of New Institutional Economics and of law and economics as a field. His 1937 essay The Nature of the Firm asked why firms exist at all if markets coordinate production efficiently, and answered that firms arise to internalize transactions whose costs, of search, negotiation, monitoring and enforcement, are cheaper to bear inside a managed hierarchy than to repeat across an open market. His 1960 essay The Problem of Social Cost extended the same transaction-cost logic to externalities, arguing that when parties can bargain freely and transaction costs are negligible, the initial legal assignment of a property right does not affect the efficient outcome, only who bears the cost of reaching it, an argument known as the Coase theorem; where transaction costs are significant, as in most real markets, Coase treated the careful design of property rights and institutions, not the theorem's frictionless special case, as the more important lesson. He was awarded the Nobel Memorial Prize in Economic Sciences in 1991 for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy.