Airplane Seatbacks, the Coase Theorem, and Simplistic Solutions to Difficult Questions

Posted in: Tax and Economics

Last week, a minor national debate erupted regarding the etiquette of reclining one’s seat while flying in the economy section of an airplane. With the miserable conditions in coach class becoming ever less tolerable, tempers are flaring, and there were reports of flights being disrupted by physical confrontations between passengers.

Everyone, it seems, has an opinion. Although there are plenty of issues facing the country that are far more important than this one, it is nonetheless interesting to see whether there might be more general lessons to be learned from this blip in the news cycle.

Along those lines, one business reporter for The New York Times attempted to broaden the conversation by claiming that the seatback controversy is actually “an excellent case study for the Coase Theorem.” That theorem might be vaguely familiar to many readers of Justia’s Verdict, because it has become ubiquitous in Property Law classes in the first year curriculum of American law schools. It is also frequently taught in undergraduate economics courses.

I will explain below what the Coase Theorem says, and what it does not say. More importantly, I will show that the seatback controversy is most definitely not a good case study for what most people think the Coase Theorem says. Indeed, the misapplication of the Coase Theorem to this controversy provides a window into the more general emptiness of the “law and economics” project, which has had so much influence in law schools over the last generation.

Coase and Property Rights

Ronald Coase was a professor for many years at the University of Chicago. His work has been highly influential, especially in analyzing how business firms operate and evolve. Unfortunately, he also wrote a 1960 article, “The Problem of Social Cost,” that has become one of the least understood papers in the history of economics.

Coase started from the simple fact that a well-defined property right will set the stage for possible bargaining between two parties. For example, if I want to run a pipeline across the country, I will need to determine who could legally prevent me from doing so. If my proposed path crosses a piece of land that another person owns, then that person will be legally able to stop me from using his land for my project.

Of course, I might be able to convince him to allow me to proceed, even if he is otherwise not inclined to do so, by striking an acceptable bargain, either offering money or any other consideration that the property owner might value. On the other hand, if my pipeline company owns the land, but nearby landowners do not want the pipeline to be built, then those landowners could pay me to stop construction.

It has become fairly typical for a law professor to describe this as a “Coasean” insight, but Coase certainly would not have claimed that he was the first to notice that the assignment of property rights matters in determining how negotiations might proceed between interested parties.

Quite simply, the assignment of every property right has consequences. It has consequences for the relative wealth of the parties, for their bargaining positions, and for the “economic efficiency” of the resulting transactions.

The popular, bastardized version of the Coase Theorem says that “if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights.” The author of the New York Times article noted above approvingly quotes that definition, which comes from Wikipedia.

That, however, is most definitely not what Coase said. In a widely-read 1998 article, the economist and historian Deirdre McCloskey claimed that only about a dozen people in the world understand what Coase’s theorem really said. Coase’s argument was that transaction costs are ubiquitous and important, so that it very much matters (even on narrow efficiency grounds) which party holds a property right.

That might initially appear to be a distinction without a difference, but in fact, it is essential to understand that Coase’s message was not: “If you assume there are no transaction costs, it does not matter who owns the property right.” On the contrary, he said that it is always important to look at transaction costs in order to determine who should be awarded property rights.

Property Rights Are Not as Obvious as They Seem

To be less theoretical, we can bring this back to the specific example of seatbacks on airplanes. A person in a seat could own the “property right” to recline that seat, or the person sitting behind that seat could own the right to the (minimal) legroom that exists when the seat is upright. So far, so good.

But what would make the analysis “Coasean” is not merely saying that those two possibilities exist. Instead, one must ask what reality looks like, and then ask whether we can say anything useful about transaction costs that could enhance our analysis of the issue.

The author of the Times piece mocks the people who invoke manners and civility in the debate over seatbacks: “I fly a lot. When I fly, I recline. I don’t feel guilty about it.” In an earlier column for National Review, the same author scoffed at an activist’s creation of “a passive-aggressive card that you can hand to your fellow passenger, scolding him for being so rude as to recline.”

Instead, we are told, this is simply a straightforward application of the Coase Theorem, analyzing how an analysis of property rights can help us understand and solve the problem.

But who owns the property right, the reclining passenger, or the passenger with bruised knees? Supposedly, this is easy: “When you buy an airline ticket, one of the things you’re buying is the right to use your seat’s reclining function.”

How does the author know that? Note that I am not saying that people would not generally agree that the person with access to the button is the one who can control the operation of the seat. I am asking how one can assert with utter confidence that the property right belongs to one passenger and not another. Only by answering that question could we know that the person who prevents another passenger from reclining her seat is “usurping his fellow passenger’s property rights.”

One could invoke social norms, saying that “everyone knows” it to be true that a person has the power to recline her seat. But if we are going to invoke social norms rather than legal rules, then we are back to questions of civility, rudeness, manners, and all of the other things that the writer wishes to dismiss. It cannot simultaneously be true that the analysis is impervious to social norms and the property right is only a “right” in a non-legal sense.

It might also be possible to claim that the technology itself gives the person the right to recline the seat. The button is right at her fingertips, after all. That, too, fails as an argument, because there are plenty of situations in which the person with the technical ability to do something is prevented from doing so. Cigarette smokers have cigarettes and lighters at their fingertips, too, but they do not necessarily own the right to light up. Possession is most definitely not nine-tenths of the law.

Transaction Costs and Reality

We are not, therefore, in a clear-cut situation in which the would-be reclining passenger owns the legal right to recline. Even if we were, however, Coase’s analysis is important precisely because it asks whether it might be better to assign the property right, clearly and unambiguously, to the other party. The answer will depend on the relevant transaction costs.

It is important to note here just how broadly “transaction costs” is defined for Coasean purposes. Anything that prevents parties from seamlessly and effortlessly (and immediately) solving a dispute by reaching an agreeable deal is categorized as a transaction cost. That is why Coase was so focused on transaction costs, and why it is so wrong to imagine that he was willing to assume away or minimize those ubiquitous costs.

The largest transaction cost here is, as I discussed above, determining who actually holds property right. But even if that could be easily and conclusively determined, the process of negotiation itself is hardly costless, in the Coasean sense. People might find it socially awkward to offer to pay a stranger money, and no matter how much one might wish to mock such concerns, anything that impedes easy and immediate transactions is a cost. (Put differently, the attempt to dismiss manners as mere social niceties ultimately fails, because such “soft” concerns make it more difficult for human beings to negotiate with other human beings.)

In response to such a concern, the author of that article in the Times retorted: “I understand people don’t like negotiating with strangers, but in hundreds of flights I have taken, I have rarely had anyone complain to me about my seat recline, and nobody has ever offered me money, or anything else of value, in exchange for sitting upright.”

But that is no answer at all. In response to the claim that people do not negotiate because it is costly (in a sense that is meaningful to them), that author’s response is that no one has ever tried to negotiate with him? That assertion clearly supports the claim that people find negotiating costly, not that it is trivial.

Beyond that, however, consider two further transaction costs. First, there is the question of how to enforce the agreements that might be reached between fliers. If B agrees to pay $10 to A for not reclining his seat, and B pays up, what happens next? A is still in a position to act opportunistically. For example, he can niggle over whether the “contract” specified how long the seatback had to remain upright. “You didn’t say for the whole flight!”

More to the point, A could simply take the $10, sit back down, and recline his seat. What could B do? B could try to get the flight attendant to force A to honor the contract, but the flight attendant is unlikely to have witnessed the negotiations. (And, in any case, underpaid and overworked flight attendants have better things to do.) Or B could try to get other people on the plane to shame A into compliance. Oh, but wait. We have already mocked social norms, saying that “I don’t feel guilty about it” when other people disapprove. In Coasean terms, enforcing the contract is costly.

Second, consider the incentives that are created by claiming that reclining one’s seat is a property right, and that people can purchase that right for money. At that point, the money-maximizing strategy for everyone would be to immediately recline his seat after takeoff, and then to wait for the person behind him to offer to pay him money to put the seat upright. This would be the “smart” strategy even for people who have no desire to recline their seats, because they might find that they were lucky enough to sit in front of someone who will pay them to do what they would have been willing to do for free.

In other words, the net number of costly transactions would be higher in a world where people could sell their supposed right to recline their seat, compared to a world in which people could sell the right to their legroom. If legroom were for sale, there would be no incentive for people opportunistically to force transactions that they did not really care about. People who wanted to push their seats back could ask to do so, and those who did not wish to do so would not need to engage in a costly negotiation.

In short, even if one thinks only in the most narrow economic terms about the problem of reclining seatbacks, the “Coasean” solution is either ambiguous or the exact opposite of what those who tend to invoke Coase think is obvious. Far from proving that this is an easy and straightforward question, a true Coasean analysis would lead us to conclude that we really do not know how to make the “seatback market” efficient.

In an interview very late in his life, discussing the distorted theorem that bore his name, Coase said: “I think the success of the Coase Theorem . . . is an interesting illustration of what’s wrong with economics . . . . I think it’s useful because you can show, using it, the type of contracts that would have to be made in order to have an efficient economic system. But then you have to introduce, having done that, the obstacles to doing it.”

Coase’s frustration with simplistic “Coase Theorem” answers was palpable, and for good reason. Having said, in essence, “Life is complicated, and we need to be careful to remember that,” he was amazed to discover that people had heard him to say, “When life is uncomplicated enough, things are simple.” This is worth remembering in all of the many areas in which legal scholars and others try to apply something that is wrongly called the Coase Theorem. Problems are solved not by assuming them away, but by confronting them and thinking about them clearly.

Posted in: Tax and Economics

Tags: Legal