Title

On the Misuse of the Nash Bargaining Solution in Law and Economics

Abstract

Bargaining plays a very important role in a great deal of legal scholarship, particularly in law and economics scholarship. Scholars often assume that the Nash bargaining solution determines the bargaining outcome, where the parties equally split the joint benefit created by the agreement. This solution, however, is inappropriate when parties have outside options, alternatives that only provide a payoff if the bargainer terminates the original bargaining. Most legal bargaining problems involve outside options. This article explains why the Nash bargaining solution generates an inappropriate outcome in this situation. Then, it examines several different prior articles that have used the Nash bargaining situation even though the bargaining problems these articles analyzed involved outside options. In particular, it demonstrates how the results from those articles would differ had they used a bargaining solution that was more appropriate for the situation they were analyzing. Finally, it argues that law and economics scholarship could benefit from a more careful modeling of bargaining problems.

Disciplines

Economics | Law and Economics

Date of this Version

August 2004