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Resolving Contractual Disputes: Arbitration vs Mediation

  • Surajeet Chakravarty

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    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.

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    File URL: http://www.bris.ac.uk/Depts/CMPO/workingpapers/wp117.pdf
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    Paper provided by Department of Economics, University of Bristol, UK in its series The Centre for Market and Public Organisation with number 05/117.

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    Length: 49 pages
    Date of creation: Mar 2005
    Date of revision:
    Handle: RePEc:bri:cmpowp:05/117
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