The economics of mediation in contractual relationships: From a fat lawsuit to a lean agreement

Effective mechanisms for dispute resolution and the maintenance of contractual relations in voluntary exchanges are an important means of improving the welfare of economic agents under conditions of risk and actual conflicts over limited resources. A mediator is called upon to assist in resolving such conflicts without directly participating in decision-making. The involvement of mediators in the settlement of business disputes has become increasingly common and continues to gain popularity within the framework of alternative dispute resolution (ADR). Building on the conceptual core of transaction cost economics, the paper explains the economic rationale and scope of mediation in business disputes. It clarifies how mediation differs from the involvement of a third party in transactions (a tripartite transaction governance mechanism) and why it is particularly suitable for supporting hybrid institutional arrangements. Applying the conceptual framework of transaction cost theory makes it possible to identify the functions of mediation and the mediator in contractual relations through two key aspects — contract incompleteness and information asymmetry. The differences between a mediator and an arbitrator, consultant, and regulator are highlighted, and the mechanics of information exchange between the parties with the mediator’s participation are described. In addition to applying the analytical tools of transaction cost economics to explain the economic foundations of mediation, the novelty of the study lies in a detailed analysis of mandatory (forced) mediation as one of the alternative methods of conflict resolution. The paper demonstrates both the advantages and limitations of this approach. Finally, it outlines directions for further research in this emerging field within the frameworks of transaction cost economics and the theory of executive behavior management, identifying several issues related to the use of mediation as a tool for resolving conflicts in antitrust enforcement.

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