The Coase Theorem Rules at NYU Law

The most fundamental principle in the field of law and economics is the Coase Theorem, initially put forth by my friend and former colleague Ronald Coase, who is still intellectually active in his nineties.

The Coase Theorem says that — absent large transaction costs — resources will end up being efficiently allocated, regardless of who holds the initial property rights.

NYU Law School is providing its students valuable real world experience with the Coase Theorem, according to this ABA Journal article.

Class assignments are made by lottery. There are no waiting lists for classes. This gives students an incentive to sign up for the most popular classes, even if they don’t want to take them. If they win a seat in one of the most sought-after classes, they can work out a deal to sell their seat to another student. (The way this is done is by the person holding the winning lottery ticket withdrawing from the class and the other person signing up for it a few seconds later; since there isn’t a waiting list, this scheme will work as long as no one else happens to sign up for the class in that few-second gap.)

In the end, the students willing to pay the most for classes are the ones taking them, which is efficient.

As in other areas (like organ donation), using cash to determine who gets into classes upsets some people. One of my students got into trouble for trying to sell her spot in my class, for instance.

Most likely NYU’s response to this publicity will be to change its policies, hopefully to a bidding system that will also lead to an efficient allocation. I would argue, however, that they should maintain the current system as a means of teaching the students about the Coase Theorem in a way they are sure to learn it.

The other reason that NYU might want to keep the system is that now that prospective students know about it, there might be a surge of applications. Rumor has it that students are willing to trade not just money, but also sex, to get access to popular classes.

(Hat tip: Mauro Tucci, Jr.)