Friday, July 11, 2003

Ashton, Demi, and Coase

One implication of the Coase Theorem is that assets will tend to get allocated to their highest-valued uses, regardless of who owns them initially, as long as trade is possible. Thus, for example, it is unlikely that the introduction of free agency in sports leagues results in a different allocation of players among teams than would result under a pure draft system. Suppose that player X would bring more added revenue to Team A than to Team B. Under a pure draft, if player X is “owned” by Team B, Team A will end up buying the player (because A is willing to offer more than the minimum B will accept). Under free agency, the player owns himself, and Team A will win the bidding war. Either way, player X winds up playing for Team A.

This particular economic principle came to mind, believe it or not, when I read this Slate article on celebrity dating. The article observes that when movie stars were effectively “owned” by their studios, the studios regularly tried to arrange romantic relationships – real and faux – for their stars, in a fashion designed to increase studio profits. For example, actors would sometimes be told to dump unknown girlfriends and trade up to celebrity girlfriends. Now stars are free agents, but the romantic game is pretty much the same. These days, the actors do the dumping and trading up on their own:
But celebrity romance has not changed radically, because celebrities have become so savvy about their own images that they do what the bosses used to. "Movie stars have unconsciously become their own publicists. It is an instinctive skill. They don't need publicists to tell them what boyfriends and girlfriends are good for their career," says Paramount producer Lynda Obst.
In other words, assets – in this case, celebrities – will tend to be used in a fashion that maximizes their value, regardless of initial ownership. It’s the Coase Theorem at work.

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