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Managing a Conflict

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  • Schneider, Johannes
  • Balzer, Benjamin

Abstract

We study the optimal design of alternative dispute resolution (ADR) mechanisms by a third-party mediator. ADR takes place before two litigants face each other in court. Litigation is a legal contest with players who are privately informed about the cost of collecting admissible evidence. Players update their beliefs after the mediation process, but before they decide on evidence collection. Different from standard mechanism design problems, the belief-system post-ADR is important for the outcome of the continuation game: within litigation, choice variables are strategic complements and the evidence supplied is driven by the belief system. There is an incentive for parties to misreport in ADR to profit from this deviation in litigation should ADR fail to resolve the conflict. We show that optimal ADR has to break down on-path in some cases to screen the players with respect to their costs. Furthermore, ADR induces truthful reporting by creating post-breakdown beliefs which are independent of own type-reports during ADR. To reduce inefficiency vis-à-vis symmetric litigation, optimal ADR induces asymmetric breakdown beliefs even for ex-ante symmetric types to increase the settlement rate compared to symmetric mechanisms. Independent of the set of parameters, ADR achieves settlement for the majority of cases.

Suggested Citation

  • Schneider, Johannes & Balzer, Benjamin, 2016. "Managing a Conflict," Annual Conference 2016 (Augsburg): Demographic Change 145686, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc16:145686
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    File URL: https://www.econstor.eu/bitstream/10419/145686/1/VfS_2016_pid_6654.pdf
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    References listed on IDEAS

    as
    1. Doornik, Katherine, 2014. "A rationale for mediation and its optimal use," International Review of Law and Economics, Elsevier, vol. 38(C), pages 1-10.
    2. Michael R. Baye & Dan Kovenock & Casper G. Vries, 2005. "Comparative Analysis of Litigation Systems: An Auction-Theoretic Approach," Economic Journal, Royal Economic Society, vol. 115(505), pages 583-601, July.
    3. Dan Kovenock & Michael R. Baye & Casper G. de Vries, 1996. "The all-pay auction with complete information (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(2), pages 291-305.
    4. Celik, Gorkem & Peters, Michael, 2011. "Equilibrium rejection of a mechanism," Games and Economic Behavior, Elsevier, vol. 73(2), pages 375-387.
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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