Legal disputes and the influence of bargaining rules and institutions on economic outcomes

Up to this point we have largely ignored the issue of how parties involved in Coasean bargaining might actually split the gains from exchange, and how rules around bargaining might affect the distribution of the gains from trade. But bargaining norms, rules and institutions are an important part of the legal landscape, and can have a considerable influence on economic outcomes. Moreover, the way in which the gains from settlement are distributed can send an important signal to those who may be involved in legal disputes in the future. For example, if bargaining rules provide for generous settlement terms for plaintiffs, then, ceteris paribus, this increases the gains to plaintiffs from filing lawsuits.

There is a well-developed body of economic theory, known as bargaining theory, which examines these issues. There are two broad approaches to modelling bargaining norms and institutions:

  • 1. The non-cooperative bargaining approach starts out with a set of 'rules of the game', under which offers and counteroffers can be made by parties, and derives the bargaining outcome as the equilibrium of a non-cooperative 'offer and acceptance' game.
  • 2. The axiomatic bargaining approach posits a set of axioms or which are 'reasonable' for a bargaining solution to possess, and then attempts to characterise these axioms in terms of bargaining solutions.

There are significant analytical differences between the two approaches. Remarkably, however, it turns out that there are often very close links between the outcomes that each approach predicts.

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