The prisoner’s dilemma is a simple and famous illustration of a problem that’s very common. One of the areas in which it is common is the arms race where two parties competing with each other each invest to outdo the other. This is visible in lots of situations. In some areas of patent law it’s pretty obvious that there’s a net social loss – I’m thinking for instance of software patents where virtually all inventions that get patented would have come into existence without the patent and yet patents are acquired by rent seeking ‘patent trolls’, or firms that not surprisingly are happy to take the windfall of a monopoly over an invention they would have come up with in any event and if you’re in the industry and you’re not one of those firms, then you have to patent to prevent one of the patent trolls coming after you and getting you to pay them protection money.
In other industries the case regarding patents, especially those that require heavy investment to bring things to market and the innovation thus generated is easy to immitate, things aren’t so clear cut. Though there remains an incentive to overinvest in such things (for instance for defensive purposes) the regime may generate more benefits than costs and the relevant policy question is how it can be optimally calibrated.
And the law generally is such a prisoner’s dilemma with results as confirmed in this study.
Do the parties in a typical dispute face incentives similar to those in the classic prisoner’s dilemma game? In this paper, we explore whether the costs and benefits of legal representation are such that each party seeks legal representation in the hope of exploiting the other party, while knowing full well that failing to do so will open up the possibility of being exploited. The paper first shows how it is possible to test for the presence of such an incentive structure in a typical dispute resolution system. It then reports estimates of the incentives for the parties to obtain legal representation in wage disputes that were settled by final-offer arbitration in New Jersey. The paper also reports briefly on similar studies of data from discharge grievances, court-annexed disputes in Pittsburgh, and child custody disputes in California. In each case, the data provide evidence that the parties face strong individual incentives to obtain legal representation which makes the parties jointly worse off. Using our New Jersey data, we find that expert agents may well have played a productive role in moderating the biases of their clients, but only early on in the history of the system. Over time, the parties slowly evolved to a non-cooperative equilibrium where the use of lawyers becomes nearly universal, despite the fact that agreeing not to hire lawyers is cheaper and does not appear to alter arbitration outcomes.
What can be done about this? Well one can ban legal representation, as happens in some small tribunals. But that can be very unfair to those with the least idea of what’s going on. They may find it prejudicially hard to put their case.




