Chapter 2: Chapter 2: Dispute Dispute
Resolution Resolution TheoryTheory
Theoretical Negotiation Theoretical Negotiation FrameworkFramework
Objective:
Examine fundamental concepts and analytical tools of negotiation
DEFINITIONSDEFINITIONS
Negotiation: bargaining; fundamental method of dispute resolution
Mediation: negotiation carried out with assistance of a 3rd party
Conceptual Negotiation Conceptual Negotiation ModelModel
IDENTIFIES:
Stakeholders
Factors that encourage or inhibit negotiation
Negotiation AnalysisNegotiation Analysis
Ways to view negotiation
Case Studies
Experimental
Institutional
Social & Political
Negotiation Choices Negotiation Choices SequenceSequence
Is negotiation worth the
effort?
Yes
No When to begin?
Strategy?Decision
Cooperative?Competitive?
Make offer?Gather more
info? Private caucus?
Decide to settle!
Decision Making Underway
Decision AnalysisDecision Analysis
Abstract but informativeexamination of competitive choice strategy
??? ? ???
Decision Making StepsDecision Making Steps
Identify parties Define range of options (and
combinations of potential related options)
Estimate consequence of various outcomes
Decision Theory LessonsDecision Theory Lessons Lesson #1: Clarifies complex
relationships
Lesson #2: To change likely negotiation result, alter incentives to encourage parties toward different bargaining decisions
Lesson #3: Provides basis for understanding reflexive reasoning & strategic thinking basis
Decision Making Lessons Decision Making Lessons (cont’d)(cont’d)
Lesson #4: Illustrates important paradoxes of bargaining
Lesson #5: Enables us to better understand importance of the manner and context of negotiation
Incentives to NegotiateIncentives to Negotiate
BATNA: “Best Alternative to a Negative Agreement”
Is the proposed outcome better than not settling alternative? Define “better”- More?- Sooner?- Less Risk?- Cheaper?
Obstacles to ConsensusObstacles to Consensus
Negotiation avoided because:No legitimacy of other parties recognizedParty seeks delayCosts of negotiating outweigh expected benefitsDivergence between individual & collective incentives prevents accord
Tragedy of the CommonsTragedy of the Commons
Tragedy of the CommonsTragedy of the Commons “Freedom in the commons brings
ruin to all”Social Responsibility
Many examples in realityFinite shared resourcesRational individual acts lead to collectively unwise outcomes
Coase TheoremCoase Theorem
Undervaluing of environmental quality due to state’s failure to define property rights clearly
Definition of property rights permit bargaining between pollution sources & recipients
Establishes optimal environmental damage price
Coase Theorem Coase Theorem (cont’d)(cont’d)
Ignores considerable obstacles to negotiation
High transaction costs discourage individual action
Regulation is a potential solution; reconfigures negotiation context
Zero Sum & Zero Sum & Non-Zero Sum DisputesNon-Zero Sum Disputes
Zero sum: gains + losses of opponents = 0; offset
Few real life examples Non-zero sum: opponents can be
better off at the same timeEnvironmental issues difficult -- outcomes hold different “value” to each party
Bargaining StrengthBargaining Strength Limited negotiation authority may carry
more power than one with complete discretion
Commitment impacts bargaining strategy in the following ways
RiskAbility to commit or refrainCommunicationFirst movePublic v. privateMay or may not be self imposed
Problem 1Problem 1
Vacation house on quiet lake in New England, current value: $75K
possible value with clean lake: $100K each septic tank
$10K to install1% of pollution reductioneach reduction increase in value (e.g., 50% install tanks all house values go up from $75 to $87.5 thousand)
Problem 1 (cont.)Problem 1 (cont.) What solutions could break the impasse? If 40 owners install, would that be enough to cause
the others to join? What kinds of private agreements could owners
fashion to insure compliance with agreement to install tanks?
If no owner has incentive to install unilaterally, how would they vote on referendum to force people to install? Would open meeting vs. secret ballot matter?
Should this be best addressed privately or by govt. regulation? Is govt. level relevant to answer?
How do answers change if we remove assumptions:• Some contribute more to pollution• Some feel the costs of pollution more than others• Benefits of pollution control are unlikely to increase
proportionate to expenditures
Problem 1 (cont.)Problem 1 (cont.)
Coase theorem: change property rights to include the cost of pollution and compensation to receivers. (no equity considerations, no implementation concerns to get around free riders or to deal with transaction costs, no process concerns)
Regulation needed because free market does not handle well such issues and does not take into account sufficiently transaction costs that prevent negotiations.
Problem 2Problem 2 Farmer plans to retire and sell tract of land Real estate developer plans to build a
subdivision and makes bid Local greenbelt group wants to buy land for
preservation in present state Farmer knows he can sell to developer for
$300K Conservationists have saved $400K to buy
land
Problem 2 (cont.)Problem 2 (cont.)
What price do you expect farmer and conservationists to settle on? Why? Would you be satisfied with this price if you were either of them? What would you do to make it more attractive?Should the bargaining range facilitate a prompt resolution or prolong negotiations?Would it facilitate settlement if each side knew the other side’s bottom line?
Seller min Buyer max
Problem 3Problem 3 Environmental group wants power
plant to reduce air pollution (SO2 & particulates)
Ideal: eliminate all pollutionWorst: no reduction in either Need to clarify position between these extremes
SO2 reduction
particulates
100%
100%
Reservation level
Preferred outcomes
0%
betterworse
Problem 3 (cont.)Problem 3 (cont.)What shape for the indiff curves? (not intersecting)Industry might accept 65/50 solution if pushed – how would technology and economy shape the company’s indifference curves?Can the two areas be merged to identify bargaining range?Imagine a tentative agreement. How can both parties get better off? Is there always such an outcome?
SO2 reduction
particulates
100%
100%
Reservation level
Preferred outcomes
0%
betterworse
Problem 4Problem 4 6 identical appt. houses on 6 lots
of equal size on city block Most profitable use: multi-family
housing, $500K Developer who assembles 6
parcels for office building $5M ($2M more than separately)
Problem 4 (cont.)Problem 4 (cont.) How should a prospective developer approach
the 6 owners – individually or collectively? (bargaining strength – whose?)
If developer can sell the 6 lots together for $5M, how much should she be willing to pay for each?
If developer has paid $600K for 5, how much should she be willing to pay for 6th? (whose bargaining strength?) Could developer rationally pay more than $5M for 6 lots?
As an appt. owner, would you want to be the first or the last to deal with the developer? What are the risks of waiting to be last?
As developer, what strategies do you devise to protect yourself from possible exploitation?