Benevolent mediation in the shadow of conflict

Before the start of a negotiation, the negotiating parties may try to manipulate its outcome by making socially-wasteful investments, such as purchasing weapons or asking for legal opinions. We study the problem of a benevolent mediator who controls the bargaining protocol of the negotiation and wishes to minimize pre-negotiation wasteful investments. We derive the efficient bargaining protocol under different specifications of the information available to the mediator. Under some conditions the mediator will choose a protocol that benefits the strongest player. We therefore highlight a potential conflict between fairness and efficiency arising in negotiations.