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Bargaining under Rules versus Standards

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  • Johnston, Jason Scott

Abstract

The efficiency of two-party incomplete information sequential bargaining over an entitlement relating to external harm is analyzed under two alternative property rights regimes: definite entitlements, where a rule allocates the entitlement to one of the parties in an ex ante certain way; and contingent entitlements, where the assignment of the entitlement depends on the outcome of an ex post judicial balancing test that weighs the value of the activity against the external harm it generates. It is shown that a contingent entitlement may make credible a threat to take--cause harm without consent--that is not credible under a definite entitlement, and that such a credible taking threat may supplant strategic delay as a screening device. Such a threat may induce immediate ex post efficient agreement. However, such a result obtains as a Perfect Bayesian equilibrium only if the legal balancing process is imperfect in measuring and balancing harm against value. Copyright 1995 by Oxford University Press.

Suggested Citation

  • Johnston, Jason Scott, 1995. "Bargaining under Rules versus Standards," Journal of Law, Economics, and Organization, Oxford University Press, vol. 11(2), pages 256-281, October.
  • Handle: RePEc:oup:jleorg:v:11:y:1995:i:2:p:256-81
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    Cited by:

    1. Bruno Deffains & Marie Obidzinski, 2009. "Real Options Theory for Law Makers," Recherches économiques de Louvain, De Boeck Université, vol. 75(1), pages 93-117.
    2. Stavang, Endre, 1997. "Tolerance limits and temporal priority in environmental civil liability," International Review of Law and Economics, Elsevier, vol. 17(4), pages 553-574, December.

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