Why Parties Enter into Unfair Deals: The Resentment Factor
2012(33) Adelaide Law Review 137-175
40 Pages Posted: 16 Oct 2012 Last revised: 22 Jul 2013
Date Written: September 5, 2012
Unfair deals, which are prevalent, do not serve the interests of the harmed party to a deal nor society more generally. This article proposes a theory — here coined ‘deal theory’ — to explain ‘dealor’ behaviours and motivations for offering unfair deals. The theory builds on insights offered by relational contract theory, the ultimatum bargaining game and behavioural economics, as well as making its own theoretical claims.
It is here claimed that the dealor makes 3Rs cost benefit calculations — regulation, reputation and resentment costs — before deciding whether or not to offer an unfair deal. A dealor might seek to mitigate these costs by deploying cheat and bully strategies. The policy and legislative challenge is to harness the 3Rs costs to provide disincentives for unfair deals. This article pays particular attention to the resentment cost because its potential effectiveness in constraining unfair behaviour has generally been underestimated.
It is claimed in this article that a heightened understanding of the strong party’s incentives and motivations for offering and performing unfair deals, by using the insights offered by deal theory, can help improve legal, administrative, economic and other measures that can promote the interests of the harmed party and society more generally.
Keywords: behavioral economics, law, regulation, ultimatum bargaining game, game theory, relational contract theory
JEL Classification: C70, C71, C72, C78, D70, D80, H10, K12, K20, K40, L50
Suggested Citation: Suggested Citation