However, Coase Theorem assumed three conditions for the conclusion to hold: (1) legal framework establishing liability for actions; (2) perfect information; and (3) zero transaction costs. Keohane argued that the absence of these conditions is the reason why institutions or regimes are needed. Keohane also address the puzzle of compliance by rational and egoistic states/governments to the rules of international regimes. He argued that the reasons for compliance lie in the value of the existing regimes and the networks of issues/regimes. .
After establishing that the existence of international regimes could be explained based on the assumption of states as rational-egoists, Keohane argued that governments could not always make rational choice. Decision makers are in practice subject to limitations on their own cognitive abilities, and therefore they are subject to bounded rationality. Keohane argued that if, as has been previously established, under the assumption of unbounded rationality governments are better off with the existence of regimes, then under bounded rationality governments will have even more reasons to rely on regimes to reduce transaction costs and uncertainties.
Keohane also argued that egoism does not always characterize the state's calculation of its self interest. He asserted that the crucial point here is how actors see their own interests relative to those of others (interdependencies of interests). He defined four types of interdependencies: (1) indifference; (2) instrumentally interdependent, in which actors are concerned with the action from other parties that could affects them; (3) situationally interdependent, in which actors" welfare depends on improvements in others" welfare and vice versa, independent of the actors" actions; and (4) emphatic interdependence, in which actors are interested in the welfare of other parties for their own sake. Keohane argued that international regimes facilitate unbalanced exchange (of favors or resources) among states.
