I have a bad, bad neighbor. He’s actually a lovely guy but he spoils his kids and let’s them do crazy stuff. Several concussions and broken bones later, my bad, bad neighbor has not learned his lesson – the kids are still wild.
My kids are quite envious of the neighbor’s kids. They’re allowed to perform death-defying acts our kids can only dream of doing. My kids think I’m a bad dad because I won’t let them do death-defying stuff.
So I had a chat with the neighbor to try to persuade him to internalize externalities. Unfortunately, he is an argumentative lawyer. He appears to have heard of the Coase Theorem. So he says I should pay him to be a good neighbor. After all, he wants to indulge his children so, for him, doing what I want has a negative effect. I super-Coased him and pointed out that my transferring stuff to him creates perverse effects – he has the incentive to create more crazy activities – perhaps even ones he himself thinks are crazy to extract surplus from me. (By the way, of course it is not about the money. He is a competitive neighbor so he would love to “win” just for the sake of it.)
So, really, he should pay me not me pay him. That was my counter-proposal. He is puzzling over it – frankly, it has obvious flaws, though not ones I will reveal in this post just in case he reads it. In the meantime, crazy stuff continues.
(Of course many elements of the post are fictionalized and are a composite of many experiences and incidents, most involving my spouse.)
Cheap Talk 
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October 7, 2014 at 8:06 am
enrique
A “meta-Coase theorem”? Isn’t there a problem of infinite regress here? That is, couldn’t your a-hole neighbor simply offer to you that pay him not to pay you not to pay him?
October 7, 2014 at 9:58 am
Ed Hollison
This was hilarious to me. I hate when I pull out the economics card only to find that the opposing party is ready and willing to meet me on the nerdy battlefield.
When I was a naive college student, we had a neighbor who routinely called the police to tow our cars, because they were all registered out of town and didn’t have town street parking stickers. So I told him we should come to some agreement, because he was the only one bothered by it, and we’d be glad to give him some “gift” to compensate. That didn’t go over too well.
October 7, 2014 at 1:48 pm
David
Seems to me that the direct impact on their kids suffering and parents dealing with broken bones and concussions dwarfs any negative psychic impacts that your kids are feeling…. with that in mind, rather than paying him to stop, why not “subsidize” even crazier activities for their kids?
October 7, 2014 at 6:52 pm
Sandeep Baliga
Love this idea. Use escalation and tit-for-tat repeated game strategies.
October 15, 2014 at 4:03 am
Sander Heinsalu
The problem seems to be your unawareness of what other activities the neighbour could come up with, so you cannot contract on him stopping inventing new activities as well as stopping the current activities. But Maskin and Tirole (1999) offer a solution: contract on utility levels directly, not on outcomes or behaviours. The revelation of the utility levels can be appropriately incentivized.
October 23, 2014 at 6:15 pm
Infinite regress, bias, and the Coase theorem | prior probability
[…] in addition, this hypothetical scenario, courtesy of Sandeep Baliga (edited for […]
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