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Conflict with Quitting Rights: A Mechanism Design Approach

  • Madhav S. Aney

    ()

    (School of Economics, Singapore Management University)

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    Why do agents engage in costly dispute resolution such as litigation and arbitration when costless settlement is available? I present a model with one sided asymmetric information where the payoff from litigation for both agents depends on the beliefs of the uninformed agent. Taking these payoffs as their outside options, agents negotiate over the allocation of an indivisible object that is in dispute and transfers. It is shown that it is impossible to implement an allocation that satisfies budget balance that guarantees the agents their payoff from conflict when agents can quit negotiations unilaterally at any stage.

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    Paper provided by Singapore Management University, School of Economics in its series Working Papers with number 18-2012.

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    Length: 31 pages
    Date of creation: Apr 2012
    Date of revision:
    Publication status: Published in SMU Economics and Statistics Working Paper Series
    Handle: RePEc:siu:wpaper:18-2012
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    1. Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn.
    2. Joshua Lerner, 1994. "The Importance of Patent Scope: An Empirical Analysis," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 319-333, Summer.
    3. Christian Riis & Derek J. Clark, 1997. "Contest success functions: an extension," Economic Theory, Springer, vol. 11(1), pages 201-204.
    4. Luca Anderlini, Leonardo Felli, & Andrew Postlewaite, 2003. "Should Courts Always Enforce What Contracting Parties Write?," Working Papers gueconwpa~03-03-29, Georgetown University, Department of Economics.
    5. Daniel Friedman & Donald Wittman, 2007. "Litigation with Symmetric Bargaining and Two-Sided Incomplete Information," Journal of Law, Economics and Organization, Oxford University Press, vol. 23(1), pages 98-126, April.
    6. Alon Klement & Zvika Neeman, 2005. "Against Compromise: A Mechanism Design Approach," Journal of Law, Economics and Organization, Oxford University Press, vol. 21(2), pages 285-314, October.
    7. Steven Shavell, 1989. "Sharing of Information Prior to Settlement or Litigation," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 183-195, Summer.
    8. Celik, Gorkem & Peters, Michael, 2011. "Equilibrium rejection of a mechanism," Games and Economic Behavior, Elsevier, vol. 73(2), pages 375-387.
    9. Fearon, James D., 1995. "Rationalist explanations for war," International Organization, Cambridge University Press, vol. 49(03), pages 379-414, June.
    10. Helmut Bester & Roland Strausz, . "Imperfect Commitment and the Revelation Principle," Papers 004, Departmental Working Papers.
    11. Barry Nalebuff, 1987. "Credible Pretrial Negotiation," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 198-210, Summer.
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