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?