Abstract: We study the design of arbitration aiming to settle conflicts that otherwise escalate to a costly escalation game. Participation in arbitration is voluntary. Players have private information about their strength in the escalation game. The designer fully controls settlement negotiations but does not control the escalation game. We transform the mechanism-design problem of arbitration into the information-design dual problem of belief management. The dual problem identifies how the properties of the escalation game influence the optimal mechanism. We use our general results to study optimal alternative dispute resolution in the shadow of a legal contest.
Abstract: We consider firms contemplating to coordinate on a standard in the shadow of a given market mechanism. Firms either coordinate on the standard through a standard-setting organization (SSO) or a market solution --a standard war-- emerges. A firm’s veto to participate in the SSO triggers the standard war. Participation constraints are demanding and the optimal SSO may involve on-path vetoes. We show that vetoes are effectively deterred if firms can (partially) release private information to a non-complying deviator. We call this instrument informational punishment. Informational punishment relaxes participation constraints and increases the set of implementable SSOs.
Abstract: We study the optimal design of alternative dispute resolution (ADR) mechanism by a third-party mediator. We compare different legal systems, and commitment levels of ADR with respect to settlement ratios and level of inefficiency. ADR takes place before two litigants face each other in court. Litigation is a legal contest with players who are privately informed about the cost of collecting admissible evidence. Players update beliefs after ADR, but before they decide on evidence collection. Different from standard mechanism design problems, the belief-system post-ADR is important for the outcome of the continuation game: within litigation, choice variables are similar to strategic comple ments and the evidence supplied is driven by the belief system. There is an incentive for parties to misreport in ADR to profit from this deviation in litigation should ADR fail to resolve the conflict.
Abstract: I study a model in which an informed sender can propose a project to an uninformed receiver. The receiver can accept or reject the project's implementation. If the receiver rejects, the sender can propose a different project to the receiver, which, in turn, may be accepted or rejected. Overall, only one project can be implemented. Both players share preferences about the features of the project. Across projects, preferences are not aligned.
There are two classes of equilibria. There always is a mixed-strategy equilibrium in which the sender panders towards the receiver-preferred project and the sender-preferred project is only implemented with a probability less than one. If the time horizon is sufficiently long a second type of equilibrium exists in which the sender persuades by waiting. In principle, many waiting equilibria exist. The shortest waiting equilibrium is ex-ante Pareto-dominated by the mixed strategy equilibrium, but a waiting equilibrium with intermediate waiting time is preferred by the receiver to all other equilibria.
As an application, I consider a firm that needs clearance of a proposed merger by an anti-trust authority. Merger realizations are private to the firm. Both players prefer higher synergies. The authority prefers high competition, the firm prefers low.