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Resolving Contractual Disputes: Arbitration vs Mediation

Author

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  • Surajeet Chakravarty

Abstract

In this paper we analyze contracts written on potentially non-verifiable states. We first show that the contract always enters a dispute phase. We analyze two possible legal rules which can be used to resolve the disputes. Under both rules the paper derives the optimal contract. An interesting feature of the optimal contract is that for low verifiability likelihood the agent is always rewarded unless there is failure. The other result is that under both legal rules used first-best effort and more than first-best-effort level can be implemented, depending on how small the likelihood of verifiability is.

Suggested Citation

  • Surajeet Chakravarty, 2005. "Resolving Contractual Disputes: Arbitration vs Mediation," The Centre for Market and Public Organisation 05/117, The Centre for Market and Public Organisation, University of Bristol, UK.
    • Handle: RePEc:bri:cmpowp:05/117
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    File URL: http://www.bris.ac.uk/Depts/CMPO/workingpapers/wp117.pdf
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    References listed on IDEAS

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    JEL classification:

    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior

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