Mediation, arbitration and negotiation

Abstract

Abstract. We compare three common dispute resolution processes -negotiation, mediation, and arbitration -in the framework of Crawford and Sobel (1982). Under negotiation, the two parties engage in (possibly arbitrarily long) face-to-face cheap talk. Under mediation, the parties communicate with a neutral third party who makes a non-binding recommendation. Under arbitration, the two parties commit to conform to the third party recommendation. We characterize and compare the optimal mediation and arbitration procedures. Both mediators and arbitrators should optimally filter information, but mediators should also add noise to it. We find that unmediated negotiation performs as well as mediation if and only if the degree of conflict between the parties is low.

Optimal sequential delegation

“…Take a delegation set D p and consider the effect of adding a single actionx p + ε to D p (where ε > 0 is small). On the one hand, for states higher thanx p + ε/2 + b, the agent's decision 13 Alonso and Matouscheck (2008) proceed in the same fashion. 14 Observe that removing these actions does not upset incentive compatibility.…”

“…We therefore restrict attention to minimal optimal delegation menus in the sense that any action in the delegation set is chosen in some state and that unchosen actions are removed. 13,14 The minimal optimal delegation menu has the property that in the most extreme states, the most extreme actions are chosen, and that there is at most one action outside the support of the state. To state this formally, we introduce the following notation for the minimal and maximal actions in a delegation set D p (for p ∈ {h, }) which we shall use throughout the paper: 15…”

“…We may use (13) to evaluate the effect of marginal sequential delegation on the principal's utility, conditional on facing the h-type. Since β st is increased only marginally, the gap necessary to maintain incentive compatibility is also only marginal.…”

“…ond and fourth term in (13)). Yet it does affect both what remains from the information effect (the third term in (13)) and the loss-of-control effect (the fifth term in (13)). …”

“…Because a marginal modification is not profitable, any increase of the upper endpoint of the htype's delegation set increases the agent's utility in stateω h (times b) by more than the agent's aggregate utility over the states [ω ,ω h ). Hence, by (13), any potential gain from a non-marginal modification must come from the effect it has on the agent's utility in state ω h and on the agent's aggregate utility over the states (ω h , ω ). But the agent's utility in those states is already maximized under marginal sequential delegation.…”