I reconsider Farrell’s comparison of Coasean bargaining under incomplete information with second-best centralized regulation. Farrell (1987) got an ambiguous result: depending on the distribution of types, Coasean negotiations may be more or less efficient on the average than a „bumbling bureaucrat" maximizing expected welfare. In his analysis, the regulator is empowered to change the rights’ structure without limit and to switch from sure public property rights to sure private rights. In the present paper, I will relax this assumption and explore the case of unsure property rights, which I argue to be the more realistic setting.

Environmental regulation, e.g., a project-permit prescribing specific activities for environmental protection, is typically based on environmental laws which give wide discretion to regulating agencies. This discretion has to be granted because the underlying environmental problems are complex, which makes it impossible to consider every contingency during the formulation of bills. Thus, environmental laws are incomplete. Discretion may lead to agency’s abuse of its power; therefore, parties have the right to sue against agency decisions. Under an incomplete law, the trial outcome will be unsure, meaning unsure public property rights ex ante. Legal standing of private parties against agency decisions may be interpreted as an attenuated private property right. Investors usually have the possibility to challenge the agency’s prescriptions; however, the extent to which affected third parties have standing in the courts largely differs between countries, e.g., between the United States and Germany. Hence, while the introduction of sure property rights may not be within reach of legislative bodies because of complexity and the separation of powers in democratic societies, an extension of legal standing for affected parties is possible by an adequate reform of administrative and environmental law. The efficiency implications of such a reform will be explored in this paper in a setting of incomplete information.

I consider a situation where the environmental damage caused by an economic project is private information of the affected party, say, a local community represented by a citizen group. The possibility of the parties to use the court system is modeled as outside options of the subsequent bargaining game. I first analyze the case where the citizen group does not have standing. Because of the unsure court outcome, bargaining incentives emerge between the investor and the bumbling bureaucrat. I use Nash’s axiomatic solution and the outside option principle to solve this bargaining problem. The inefficiency of the outcome will be greater than under a bumbling buraucrat owning a sure public property right. The introduction of standing for the citizen group yields bargaining incentives between the private parties. I show that under unsure rights, inefficiencies caused by asymmetric information may vanish, independent of the type distribution. This happens, when the outside option of the investor is a credible threat, which is the case for a wide parameter range. Then, the citizen group has an incentive to reveal its type, and the bargaining outcome may even be first-best efficient.

The conclusion is that a strong legal standing for affected parties will not only improve efficiency in a setting of complete information, but may also have a preference-revealing quality, when the valuation of environmental damage is private information. The ambiguous result derived by Farrell is shifted in favor of decentralized bargaining; for some parameter values, private bargaining will even be first-best efficient.