A rationale for mediation and its optimal use

We propose a novel explanation for how pre-trial mediation might increase the likelihood of settlement. The mediator verifies the plaintiff's private information about the court's judgement and communicates this to the defendant, without disclosing confidential details that would disadvantage the plaintiff in court. This increases the plaintiff's incentives to reveal information and increases settlement rates. We then compare total dispute resolution costs without mediation, with compulsory mediation, and with mediation on request by the plaintiff. If the cost of mediation can be allocated optimally among the parties, then compulsory mediation is never optimal, but prohibition may be. However, compulsory mediation can be optimal when the allocation of costs is fixed. A regime of mediation on the request of either party is an equally efficient alternative to compulsory mediation. In contrast, mediation by mutual consent can be less efficient than prohibited mediation.