The role of bargaining rules in dispute resolution

In the non-cooperative setting described above there are at least two very real ways in which bargaining norms, rules or formal regulations that govern dispute resolution can affect the distribution of the parties' payoffs, and which will therefore alter incentives to sue and settle:

  • 1. The identity of the first mover: In the equilibrium described above,
  • 1 + 3T+1

the factory's payoff is п , which is greater than the residents'

/ T . x 1 + 3 I 1 + 3Т +1 1

payoff п 1--as long as 3< 1. If the parties are otherwise identi-

V 1 + 3 )

cal, the first mover always receives a higher payoff.

2. The number of rounds of offers and counteroffers that are permitted (the length of T): Consider the extreme case where the residents are not permitted to make a counteroffer and must accept the factory's offer. Then clearly the residents will receive no surplus, which is the worst outcome for them. More generally, note that for 3 < 1 , we have:

so that the factory's payoff is decreasing (and the residents payoff is increasing) in T. Even though the parties will reach agreement immediately, the factory (the first mover) prefers a bargaining rule which prevents a large number of counteroffers being made, whilst the second mover prefers that counteroffers be allowed for an indeterminate amount of time.

 
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