Politics with(out) Coase

Political markets may be curative of political externalities, yet they are often unviable due to the presence of bargaining externalities. In this paper, we study the extent to which the choice of voting dimensions may affect the viability of Coasian bargaining in a political context. The results suggest that bargaining in a multi-dimensional policy space, although desirable in an ideal world of zero-transaction costs, is almost unavoidably affected by bargaining externalities. Disaggregating the policy choices and voting in a one-dimensional policy space can reduce bargaining externalities and lead to median voter outcomes. Bargaining by a limited number of players in a median voter situation can achieve a social first-best. We show the equivalence between the outcomes of multiple independent voting in one-dimensional space and the hypothetical outcome of Coasian bargaining in a multi-dimensional policy space.