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A Mechanism Design and Cheap Talk Approach to Mediation

Periodic Reporting for period 2 - Mediation (A Mechanism Design and Cheap Talk Approach to Mediation)

Reporting period: 2017-08-01 to 2018-07-31

"Mediation is an alternative dispute resolution method, which has gained increasing popularity over the last few decades and become a multi-billion-dollar industry. When two parties are in a disagreement, either party can take the case to a conventional court of law and have a judicial authority make a binding final decision. Alternatively, the disputing parties can seek assistance from an experienced, neutral third party, i.e. a mediator, who facilitates the negotiation and help them voluntarily reach an agreement short of litigation. Employment disputes, patent/copyright violations, construction disputes, and family disputes are some of the most common mediated disputes. The rising popularity of mediation can be explained by the increasing workload of courts, by the fact that mediation is less costly than litigation, and by the desire of some control over the final decision.

This project aimed, by using a mechanism design and cheap talk approach, to build a theoretical framework that is rich enough to determine optimal strategies, techniques, and methods that the mediators shall use for the efficient resolution of disputes. The primary purpose is to formally define the mediation problem and build a framework that is simple enough to study both single- and multi-issue mediation problems.

Many traditional ""cardinal"" settings of bargaining and mechanism design have emphasized the tension between efficiency and truthful incentives. For this purpose Dr Ozyurt has adopted and further explored an ""ordinal"" mechanism design approach and characterized the full class of strategy-proof, efficient, and individually rational mediation rules."
Especially in the first six months of his visit, Dr. Ozyurt spent significant amount of time and energy to meet and connect with mediation experts and practitioners for the purpose of better understanding of the theory and practice of mediation. For this reason, Dr. Ozyurt audited a course and a standard mediation training program at Harvard University Law school, participated several conferences, and met various experts and practitioners. At the same time, Dr. Ozyurt deepened his readings of various literature, including social psychology, law, and business on bargaining and mediation.

Dr. Ozyurt’s action plan since the beginning of the project had two components:

1) Dr. Ozyurt has studied four theoretical frameworks and got various interesting results. A more detailed explanation for these models and their results are attached in Part B of this report.
2) Dr. Ozyurt was aiming to do empirical research on mediation in the long run. After realizing the great need in the field, he devoted significant time and energy on training himself on empirical research. For this purpose, Dr. Ozyurt audited courses (econometrics and development economics) and trained himself for program evaluation, randomized controlled trial (RCT) experiments, and micro econometric analysis. Furthermore, with the intention that best way of learning is “learning by doing,” Dr. Ozyurt has started to work on a joint project with Asim Khawaja, a development economist at Harvard University Kennedy School.

A summary for Dr. Ozyurt’s theoretical and conceptual models on mediation and main results:

Dr. Ozyurt worked on two modelling settings under cardinal framework, negotiation with verifiable strength and cheap talk, but decided not to adopt these two setups for further exploration as explained in Part B.

Dr. Ozyurt studied an ordinal mechanism design framework where the mediator seeks a resolution over a single issue in which negotiators have diametrically opposed rankings over the alternatives. Each negotiator has private information about her own ranking of the outside option, e.g. the point beyond which the negotiator would rather take the case to a court proceeding. In this single mediation problem Dr. Ozyurt shows that there exist no efficient and dominant strategy implementable (DSI) mediation rules. However, there are efficient Bayesian inventive compatible (BIC) mediation rules with additional appealing properties if the negotiators’ utility functions are sufficiently concave (i.e. the negotiators are risk averse).

The only DSI mediation rule is a constant one, where the mediator always suggests the same alternative. On the other hand, split-the-difference rule, where the mediator always suggests the median alternative of the declared mutually acceptable outcomes, is a BIC mechanism. This rule is often used mechanism in bilateral negotiations. There are many other BIC mediation rules. However, split-the-difference rule is the only symmetric, monotonic and efficient Bayesian incentive compatible rule when the number of available alternatives is small. Dr Ozyurt extended this framework to multiple issues with a possibility result in dominant strategies. The extensive findings in this setup are collected as a publishable paper, which is coauthored with Onur Kesten from Carnegie Mellon University. The final version of the paper, which is attached in Part B, is submitted to Econometrica.

In the return phase of the project Dr. Ozyurt had the opportunity to present his project in various universities (18) and conferences (4), which attracted other economists' attention to the subject. Dr. Ozyurt also advised a masters thesis on mediation during this period. He also started three other projects on the subject (please see Part B for more details).
The impossibility result of Myerson and Satterthwaite (1983) has big impacts on the field that this project is closely related. Research on negotiation as a mechanism design problem was not a flourished field mainly because of their impossibility result. Before starting this project, Dr. Ozyurt was anticipating similar impossibility results in mediation setup, and thus aiming to understand the second-best mechanisms. However, Dr. Ozyurt has shown that the particulars of the mediation problem is different than the bargaining problem that Myerson and Satterthwaite (1983) studied and that there exists efficient and Bayesian incentive compatible mechanisms. This result was beyond Dr. Ozyurt’s expected potential benefit. This new result would open new doors to researchers in the field of mechanism design and negotiation. In particular, Dr. Ozyurt has successfully shown that possibility results are achievable in a framework that is highly applicable (please see the final draft of the paper in Part B).

The project had immense impact on Dr. Ozyurt’s career development. During the project, Dr. Ozyurt has realized that high quality empirical research in mediation is almost non-existing and such research would greatly benefit practitioners, policy makers and the society in large. For this reason, Dr. Ozyurt has made valuable investments in his tool kits and human capital by dedicating significant amount of time to educate himself on empirical research. Dr. Ozyurt has the opportunity to be one of the pioneers in the field of mediation and alternative dispute resolution, and this project was the seed project for many related multidisciplinary projects that hopefully will follow.