Are Efficient Bargaining Power Disparities Unfair? An Experimental Test

Abstract

A key question in labor and contract law is when does bargaining power disparity become too large to be considered ‘impermissible’? It has largely been debated from the potentially conflicting perspectives of efficiency and fairness. These debates exhibit the intuitively plausible but empirically untested presumption that efficient bargaining power disparities can be unfair. The paper focuses on ex-post bargaining between agents locked in a relationship without a complete contract wherein surplus may ultimately be realized with or without mutual consent. We propose a consent-based definition to categorize a bargaining power disparity as either efficient or inefficient by treating surplus realized without mutual consent as an imperfect substitute for surplus realized with mutual consent. In order to categorize a power disparity as either fair or unfair, we draw upon some legal doctrines to propose a two-sided definition that accounts for the perspectives of both the weaker and the stronger bargaining parties. The experiment provides no robust evidence to support the presumption that economically efficient power disparities can be unfair.

Keywords: Bargaining power, consent, efficiency, fairness, law, contract

JEL Codes: K0, C72, C91, D63

View paper (PDF, 2.1 MB)

Presenter

Presented by Aaron Nicholas, Deakin University.

Further information

While here, Aaron Nicholas will be using room 520A Colin Clark building.  If you would like to meet with him or have lunch or dinner with him please contact Marco Faravelli who will be his host.