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Much of the economic literature on Alternative Dispute Resolution ("ADR") displays a surprising failure to differentiate between types of dispute resolution devices. Often when economists purport to examine the efficiency of ADR, they focus exclusively on arbitration or other forms of private adjudication. Mediation—negotiation facilitated by a neutral third party—has received far less attention than arbitration in the economic literature. The neglect of mediation is particularly surprising because mediation is more "alternative" than arbitration. Arbitration (in both its binding and nonbinding forms) asks the arbitrator to replicate the decision of a court. A mediator, by contrast, stops short of recommending how the dispute should be resolved. By focusing on arbitration when they examine ADR, economists have failed to provide a coherent rationale for mediation.

The ADR literature has succeeded in fleshing out noneconomic explanations for mediation. Robert Mnookin and Lee Ross, for example, have suggested several ways in which a mediator might overcome psychological barriers to conflict resolution, but they have not explained how a mediator might overcome the barriers created by the strategic interaction of two rational, self-interested negotiators. We agree that mediators are valuable in helping parties overcome a broad variety of psychological barriers. The goal of this Article, however, is to identify how mediation also could increase the efficiency of bargaining from an economic or strategic perspective.

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