DP16934 Shuttle Diplomacy
This paper studies the role of a mediator in helping two parties to evaluate the merits of their positions in economic disputes and to facilitate settlement. In practice, mediation often operates through shuttle diplomacy; the mediator goes back and forth between the parties meeting them in a private caucus. We model shuttle diplomacy as a dynamic procedure where the mediator helps each party to gradually discover her costs and benefits of settlement, as well as to re-assess her bargaining position, while also proposing the terms of the deal and arranging temporary claim exchanges. The way the procedure progresses depends on the feedback the mediator receives from the parties during meetings with the parties. We show that shuttle diplomacy allows parties to always achieve an ex-post efficient and equitable (perfectly fair in the case of symmetric value distributions) final settlement. In contrast, this is not possible with a static mediation procedure.