Mediation, Walrasian Tatonement, and Negotiations as an Exchange Economy

Abstract

Alternative dispute resolution (ADR) procedures, such as mediation and arbitration, are becoming increasingly used to help resolve disputes in a variety of arenas. Among ADR procedures, mediation is the most utilized yet least analyzed procedure. This article examines negotiations and dispute resolution using the tools of general equilibrium theory. Specifically, mediators function as the Walrasian auctioneers of exchange theory by altering trade-off rates among bargaining issues. In this way, mediators facilitate a process leading towards voluntary settlement. This idea of Walrasian mediation is supported by the literature on mediation and mediator techniques, and so this insight opens up mediation to much more rigorous economic analysis. Among the implications of this approach are: 1) successful mediation leads to Pareto efficient settlements; 2) non-neutral mediators—those with a stake in the outcome—can guide negotiators towards preferred outcomes by introducing resources into mediation; 3) mediation Pareto dominates arbitration for resolving disputes.