IDEAS home Printed from https://ideas.repec.org/p/bri/cmpowp/05-117.html
   My bibliography  Save this paper

Resolving Contractual Disputes: Arbitration vs Mediation

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.bris.ac.uk/Depts/CMPO/workingpapers/wp117.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Hart, Oliver D & Moore, John, 1988. "Incomplete Contracts and Renegotiation," Econometrica, Econometric Society, vol. 56(4), pages 755-785, July.
    2. W. Bentley Macleod, 2000. "Complexity and Contract," Revue d'Économie Industrielle, Programme National Persée, vol. 92(1), pages 149-178.
    3. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, vol. 93(3), pages 835-857, June.
    4. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    5. de Meza, David & Lockwood, Ben, 2004. "Too Much Investment: A Problem of Coordination Failure," Economic Research Papers 269597, University of Warwick - Department of Economics.
    6. Oliver Hart & John Moore, 2004. "Agreeing Now to Agree Later: Contracts that Rule Out but do not Rule In," Edinburgh School of Economics Discussion Paper Series 109, Edinburgh School of Economics, University of Edinburgh.
    7. Bentley W. MacLeod, 2003. "Optimal Contracting with Subjective Evaluation," American Economic Review, American Economic Association, vol. 93(1), pages 216-240, March.
    8. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    9. Bernheim, B Douglas & Whinston, Michael D, 1998. "Incomplete Contracts and Strategic Ambiguity," American Economic Review, American Economic Association, vol. 88(4), pages 902-932, September.
    10. Eric Maskin & Jean Tirole, 1999. "Unforeseen Contingencies and Incomplete Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 83-114.
    11. Gallie, Duncan & White, Michael & Cheng, Yuan & Tomlinson, Mark, 1998. "Restructuring the Employment Relationship," OUP Catalogue, Oxford University Press, number 9780198294412.
    12. Prendergast, Canice & Topel, Robert H, 1996. "Favoritism in Organizations," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 958-978, October.
    13. George J. Stigler, 1974. "The Optimum Enforcement of Laws," NBER Chapters, in: Essays in the Economics of Crime and Punishment, pages 55-67, National Bureau of Economic Research, Inc.
    14. Steven Shavell & A. Mitchell Polinsky, 2000. "The Economic Theory of Public Enforcement of Law," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 45-76, March.
    15. Joseph A. Ritter & Lowell J. Taylor, 1999. "Low-powered incentives," Working Papers 1999-005, Federal Reserve Bank of St. Louis.
    16. Currie, Janet & McConnell, Sheena, 1991. "Collective Bargaining in the Public Sector: The Effect of Legal Structure on Dispute Costs and Wages," American Economic Review, American Economic Association, vol. 81(4), pages 693-718, September.
    17. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-480, March.
    18. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    19. Prendergast, Canice, 1993. "A Theory of "Yes Men."," American Economic Review, American Economic Association, vol. 83(4), pages 757-770, September.
    20. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
    21. Edlin, Aaron S & Reichelstein, Stefan, 1996. "Holdups, Standard Breach Remedies, and Optimal Investment," American Economic Review, American Economic Association, vol. 86(3), pages 478-501, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lewis A. Kornhauser & W. Bentley MacLeod, 2012. "Contracts between Legal Persons [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    2. Bentley W. MacLeod, 2003. "Optimal Contracting with Subjective Evaluation," American Economic Review, American Economic Association, vol. 93(1), pages 216-240, March.
    3. Lang, Matthias, 2019. "Communicating subjective evaluations," Journal of Economic Theory, Elsevier, vol. 179(C), pages 163-199.
    4. Matthias Lang, 2023. "Stochastic contracts and subjective evaluations," RAND Journal of Economics, RAND Corporation, vol. 54(1), pages 104-134, March.
    5. repec:eee:labchp:v:3:y:1999:i:pb:p:2373-2437 is not listed on IDEAS
    6. James M. Malcomson, 2012. "Relational Incentive Contracts [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    7. W. Bentley MacLeod & Teck Yong Tan, 2016. "Optimal Contracting with Subjective Evaluation: The Effects of Timing, Malfeasance and Guile," NBER Working Papers 22156, National Bureau of Economic Research, Inc.
    8. Ewerhart, Christian & Schmitz, Patrick W., 2000. ""Yes men", integrity, and the optimal design of incentive contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 43(1), pages 115-125, September.
    9. Robert Evans, 2008. "Simple Efficient Contracts in Complex Environments," Econometrica, Econometric Society, vol. 76(3), pages 459-491, May.
    10. Joel Watson, 2013. "Contract and Game Theory: Basic Concepts for Settings with Finite Horizons," Games, MDPI, vol. 4(3), pages 1-40, August.
    11. Helmut Bester & Johannes Münster, 2016. "Subjective evaluation versus public information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(4), pages 723-753, April.
    12. Kathrin Manthei & Dirk Sliwka, 2019. "Multitasking and Subjective Performance Evaluations: Theory and Evidence from a Field Experiment in a Bank," Management Science, INFORMS, vol. 65(12), pages 5861-5883, December.
    13. Marchegiani, Lucia & Reggiani, Tommaso & Rizzolli, Matteo, 2016. "Loss averse agents and lenient supervisors in performance appraisal," Journal of Economic Behavior & Organization, Elsevier, vol. 131(PA), pages 183-197.
    14. Schöttner, Anja, 2005. "Relational contracts and job design," SFB 649 Discussion Papers 2005-052, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    15. repec:eee:labchp:v:3:y:1999:i:pb:p:2291-2372 is not listed on IDEAS
    16. repec:hum:wpaper:sfb649dp2005-052 is not listed on IDEAS
    17. Marie-Louise Vierø, 2012. "Contracting in Vague Environments," American Economic Journal: Microeconomics, American Economic Association, vol. 4(2), pages 104-130, May.
    18. Macera, Rosario, 2018. "Intertemporal incentives under loss aversion," Journal of Economic Theory, Elsevier, vol. 178(C), pages 551-594.
    19. Chi, Chang Koo & Olsen, Trond E., 2018. "Relational Incentive Contracts and Performance Measurement," Discussion Papers 2018/6, Norwegian School of Economics, Department of Business and Management Science.
    20. William Fuchs, 2007. "Contracting with Repeated Moral Hazard and Private Evaluations," American Economic Review, American Economic Association, vol. 97(4), pages 1432-1448, September.
    21. Lucia Marchegiani & Tommaso Reggiani & Matteo Rizzolli, 2013. "Severity vs. Leniency Bias in Performance Appraisal: Experimental evidence," BEMPS - Bozen Economics & Management Paper Series BEMPS01, Faculty of Economics and Management at the Free University of Bozen.
    22. Robert Dur & Jan Tichem, 2015. "Altruism and Relational Incentives in the Workplace," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(3), pages 485-500, September.
    23. Alan Schwartz, 2004. "The Law and Economics of Costly Contracting," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 20(1), pages 2-31, April.

    More about this item

    Keywords

    Contracts and Dispute resolution;

    JEL classification:

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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bri:cmpowp:05/117. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/cmbriuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.