The Coase Theorem and Coalitional Stability

It is the contention of this paper that the Coase theorem has yet to be formulated and proved in a rigorou s manner. The paper addresses the problem of strategic coalitional be havior when more than two agents are involved in the externality. It is shown that there are examples for which nonefficient allocations a re stable in the sense of Aumann-Maschler bargaining sets, thereby vi tiating the Coase theorem. Hence a proper formulation of the Coase th eorem must exclude bargaining-set stability.