Question: A Civil Dispute as a Bargaining Game
Because trials are costly, both parties can usually gain by settling out of court. That is why so few disputes ever come to trial. The best current estimate is that approximately 5 percent of all disputes that reach the stage of filing a legal complaint in the United States actually result in litigation. Here is a problem in which you must apply bargaining theory to a civil dispute:
FACTS: Arthur alleges that Betty borrowed a valuable kettle and broke it, so he sues to recover its value, which is $300. The facts are very confusing. Betty contends that she did not borrow a kettle from Arthur; even if it is proved that she borrowed a kettle from Arthur, she contends it is not broken; even if it is proved that she borrowed a kettle from Arthur and that it is broken, she contends that she did not break it.
Assume that because the facts in the case are so unclear, Arthur and Betty independently believe that the chances of either side's winning in court are an even 50 percent. Further assume that litigation in small claims court will cost each party $50 and that the costs of settling out of court are nil. So, cooperation in this case is a matter of settling out of court and saving the cost of a trial. Noncooperation in this case means trying the dispute.
QUESTIONS:
a. What is Arthur's threat value?
b. What is Betty's threat value?
c. If Arthur and Betty cooperate together in settling their disagreement, what is the net cost of resolving the dispute?
d. What is the cooperative surplus?
e. A reasonable settlement would be for Betty to pay Arthur _____.
f. Suppose that instead of both sides believing that there is an even chance of winning, both sides are optimistic. Specifically, Arthur thinks that he will win with probability 2/3, and Betty thinks that she will win with probability 2/3.
1. What is Arthur's putative threat value (what he believes he can secure on his own without Betty's cooperation)?
2. What is Betty's putative threat value (what she believes she can secure on her own without Arthur's cooperation)?
3. The putative cooperative surplus equals _____.
4. Describe the obstacle to settlement in a few words.