Fitting the Forum to the Fuss with Sticky Defaults: Failure on the Market for Dispute Resolution Services?

Abstract

'Fitting the forum to the fuss', i.e., finding an optimal way to deal with every dispute, is an appealing slogan of proponents of alternative dispute resolution. It also summarizes the contract one would expect rational disputants to make, once they are embroiled in a conflict they cannot resolve together. Disputants can 'buy' dispute resolution services, such as various forms of court intervention, mediation, or arbitration. Agreeing to a contract to buy such services together with an opponent, however, is likely to be difficult. In this paper, these difficulties are assessed. The barriers to dispute resolution are well researched. These barriers are behavioral regularities that qualify the assumption that rational parties would solve their dispute efficiently through negotiations. Barriers to solving the dispute itself through negotiations, however, may have analogous effects on negotiations regarding a procedure to resolve a dispute. The possible psychological (cognitive) barriers, strategic/tactical barriers, and institutional/structural barriers will be discussed. We will argue that the barriers to jointly decide on a dispute resolution procedure are likely to be substantial, and to be similar to the barriers to solving the dispute itself.

If our thesis holds, the default rule for dispute resolution is 'sticky', which has important implications. First, defaults will attract the majority of disputes and should be designed carefully. Reformers of civil procedure or other dispute resolution mechanisms should not be deceived by the present use of dispute resolution services: They do not necessarily show what the preferences of disputants are. Secondly, our thesis may explain why arbitration and mediation are less frequently used than one would expect on the basis of the preferences for these dispute resolution services that are expressed in surveys, or on the basis of what one would expect rational parties to do when they optimize decision costs, error costs, deterrence benefits, and the value they attach to the procedure itself. Thirdly, it may be necessary to take a closer look at current attempts to remedy this 'market failure', such as court-annexed mediation and arbitration programs. These mechanisms may not be sufficient to create a level playing field for different dispute resolution services. Lastly, the supply side of the market is likely to be distorted. The providers of default dispute resolution services, such as courts and lawyers, are effectively shielded from competition, and may not adapt their services and prices sufficiently to the needs of customers. We offer some suggestions to remedy this market failure and conclude that a better understanding of the market for dispute resolution is needed.

Keywords: Negotiation, dispute resolution, default rules, market failure

JEL Classification: C78, D74, K12, K41, L84