Seth Godin writes:
When two sides are negotiating over something that spoils forever if it doesn’t get shipped, there’s a straightforward way to increase the value of a settlement. Think of it as the net present value of a stream of football…
Any Sunday the NFL doesn’t play, the money is gone forever. You can’t make up for it later by selling more football–that money is gone. The owners don’t get it, the players don’t get it, the networks don’t get it, no one gets it.
The solution: While the lockout/strike/dispute is going on, keep playing. And put all the profit/pay in an escrow account. Week after week, the billions and billions of dollars pile up. The owners see it, the players see it, no one gets it until there’s a deal.
There are two questions you have to ask if you are going to evaluate this idea. First, what would happen if you change the rules in this way? Second, would the parties actually agree to it?
Bargaining theory is one of the most unsettled areas of game theory, but there is one very general and very robust principle. What drives the parties to agreement is the threat of burning surplus. Any time a settlement proposal on the table it comes with the following interpretation: “if you don’t agree to this now you better expect to be able to negotiate for a significantly larger share on the next round because between now and then a big chunk of the pie is going to disappear.” Moreover it is only through the willingness to let the pie shrink that either party can prove that he is prepared to make big sacrifices in order to get that larger share.
So while the escrow idea ensures that there will be plenty of surplus once they reach agreement, it has the paradoxical effect of making agreement even more difficult to reach. In the extreme it makes the timing of the agreement completely irrelevant. What’s the point of even negotiating today when we can just wait until tomorrow?
But of course who cares when and even whether they eventually agree? All we really want is to see football right? And even if they never agree how to split the mounting surplus, this protocol keeps the players on the field. True, but that’s why we have to ask whether the parties would actually accept this bargaining game. After all if we just wanted to force the players to play we wouldn’t have to get all cute with the rules of negotiation, we could just have an act of Congress.
And now we see why proposals like this can never really help because they just push the bargaining problem one step earlier, essentially just changing the terms of the negotiation without affecting the underlying incentives. As of today each party is looking ahead expecting some eventual payoff and some total surplus wasted. Godin’s rules of negotiation would mean that no surplus is wasted so that each party could expect an even higher eventual payoff. But if it were possible to get the two parties to agree to that then for exactly the same reason under the old-fashioned bargaining process there would be a proposal for immediate agreement with the same division of the spoils on the table today and inked tomorrow.
Still it is interesting from a theoretical point of view. It would make for a great game theory problem set to consider how different rules for dividing the accumulated profits would change the bargaining strategies. The mantra would be “Ricardian Equivalence.”