Chapter 6

Robinson: Fair Negotiations

FAIR STAKEHOLDER NEGOTIATIONS

By Prof. Richard Robinson

SUNY Fredonia

Chapter Abstract

Through compensation arrangements, corporate managers are typically bonded to the interests of shareholders. As a result, managers have a conflict-of-interest in judging and paternalistically deciding settlements of distributions and opportunities for other non-owner stakeholders. Appropriate normative stakeholder-theory should therefore center on notions of fair negotiations where management openly acts as agents of the shareholders, but the other stakeholders have inputs to managerial decisions. These decisions should be viewed as resulting from fair bargaining.

An applicable set of Kantian derived rules for fair negotiations are posed here. Their appropriateness to both indirect market-based negotiation and to direct negotiation with stakeholders is examined. These rules also indicate the conditions when fair negotiations cannot be conducted so that paternalistic managerial decrees must be utilized. This includes managing the trust issues associated with low-power stakeholders who might believe they are coerced. For these situations, management’s judgement as to what settlement would have occurred if the rules were not violated are deemed fair. Various compensation analyses might also be appropriately utilized for this fairness purpose.

1. Ethical Negotiation: An Introduction

This reading poses an ethical norm for fair negotiations. It also applies this norm for an analysis of management-stakeholder relations, an essential problem for managerial imperfect duty. This application also enables clarity for understanding positive theories of managerial and stakeholder behavior. It facilitates an understanding of the ethical defects of other paternalistic management behavior and theories.

Stakeholder-balance theory (SBT) requires managers to distribute value to all stakeholders, and to do so according to a vague notion of a “fair return.” This theory also requires input from all affected stakeholders to all relevant managerial decisions. In this theory, management is envisioned as the agent representing each and all of these groups: financiers, employees, suppliers, community interests and customers. This “equal agency” notion describes the stakeholder balance approach where shareholders have no priority claim on the judgement and efforts of management, i.e., shareholders have no particular priority over other stakeholders such as employees or suppliers. The goal of the firm is therefore not shareholder wealth maximization (as often argued in the financial management literature) but rather the achievement of a balance of stakeholder interests where management becomes the arbiter of these interests.

Management, however, is bonded to the interests of shareholders through its compensation: the shareholders granting of some of the company’s equity to management, or the similar granting of stock options, and/or profit sharing arrangements. The purpose of this “bonding” is to assure a linkage between the interests of shareholders and management. This creates a conflict-of-interest for managerial decrees concerning non-owner stakeholders, the very decrees aimed at stakeholder balancing. Any paternalistic management decree of balancing these interests must therefore be viewed as suspect by these very non-owner stakeholders. In stakeholder negotiations, management must recognize, and be transparent concerning these conflicts-of-interest. This essentially demands an alternative to paternalistic management. This alternative places stakeholder theory in the domain of fairness in negotiation where management does not decree policies of balancing the interests of stakeholders, but rather must negotiate fairly with each of these interests. The theoretical normative objective of these negotiations is (i) to recognize the autonomy of stakeholders as in Kantian philosophy, (ii) to solicit their input to managerial decisions as required of the stakeholder theory reviewed above, and (iii) to achieve an harmonious stable agreement where all constituents expect to benefit equitably.

This, of course, begs the definition of what is meant by fair negotiations in the stakeholder context. This “fairness” notion is the subject of this chapter. Note that any notion of fair negotiation must (i) allow stakeholders the opportunity to express input into the management process, and (ii) result in what would be considered a “fair distribution of value to all stakeholders” as required by the stakeholder-balance theory. Note also that “expressing input” does not assure that stakeholder interests are dealt with fairly, but after this input is expressed, the remaining aspects of fair negotiations should assure this. Both of the above conditions should be perceived as likely enabled by the posed principles of these negotiations.

Decreeing intuited-fair solutions may directly conflict with Kant’s proscription against paternalism (1797, 6: 454, and also see O’Neill, 1995, pp. 120-124). We cannot claim management is allowing others the freedom to pursue their own interests, as required by the second formula of Kant’s categorical imperative, if management merely decrees its notion of what is “fair” for stakeholders. For this reason, harmony and stability (defined below) are particularly difficult to achieve through reliance on managerial imposed solutions. The Kantian notion of harmony requires that all pursue relevant moral maxims where these maxims are consistent with Kant’s categorical imperative. As stated above, this harmony requires that management fairly negotiate settlements with non-owner stakeholders where all parties are expected to benefit. This notion of fairness in this context of negotiations is the primary exploration of this reading.

The negotiation

The negotiations referred to above may occur quickly, or they may occur during a lengthy dance where the currently engaged stakeholders adjust their demands. They may be either implicit or explicit. A good example of the former type would be the hiring process where it is typical for an advertisement to be published, one that states most of the requirements of the position. Applicants are solicited who have a general understanding about the employment requirements. Perhaps some similar work experience is specified as required so that training costs are lowered. The wage is communicated, and from the pool of applicants, an offer of employment is made to whoever is considered the best applicant. In this process, it does not appear that the applicants are making any demands in the employment considerations, but implicitly they are when they apply. At this point, the applicants declare that the generally understood requirements are acceptable.

If, however, an insufficient pool of applicants is solicited by the advertisement, then the offers and the advertisement must be changed. The offer must be made more attractive, perhaps through the offered wage, or through some other change in job characteristics. In this way, the employer is implicitly negotiating with the labor market even though potential employees are not given the opportunity to sit down with the employer and haggle over terms. Even after the employee is engaged, further demands may occur that are related to continued engagement, i.e., a continued negotiation.

The fairness requirement with respect to this negotiation concerns the Kantian issues of deception, or divulgence of sufficient information, or adherence to employment law in that the employer must not violate society’s legal norms in the offered employment. If our notions of fairness and legalities are not violated, then we presume that the hired employee is autonomously pursuing their own ends, and the categorical imperative (CI) is not violated. Situations of coercion or deception would violate fairness requirements and therefore violate the CI.

Examples of explicit negotiation are more obvious. They include the face-to-face employment negotiation where the potential employee and employer do explicitly haggle over all details of the employment contract. All notions of Kantian fairness must, of course, apply to these negotiations.

It should be obvious that all implicit, and many explicit negotiations are actually market negotiations (hereby referred to as “market-based negotiations”). In fact, it is difficult to envision any market transaction that does not involve either implicit or explicit negotiation. For example, when we walk into a store and see some potential good for purchase, even if it is not a very familiar good purchased many times previously, we still assume certain properties concerning its quality assurance. Indeed, these qualities are often communicated through displays or vender attitudes of familiarity. These are all part of the implicit negotiations of the sort that states, “Keep buying from me and I will assure the quality!”

Deriving the rules of fair negotiation

It is established below, however, that the rules of fair negotiations are more explicit and extensive than perhaps previously envisioned. The work of the late twentieth century American philosopher John Rawls (1921-2002) centered on justice as derivative of fairness. Rawls’ major works include Outline for a decision Procedure for Ethics (1951), Justice as Fairness (1958), Kantian Constructivism in Moral Theory (1980), and Justice as Fairness: A Restatement (2001). His philosophy is Kantian.

This article uses Rawlsian notions of fairness, plus the Rawlsian characteristics of the virtuous manager (a reinterpretation of competent moral judge) to derive the rules of fair negotiation (in part a reinterpretation of considered moral judgement). (Rawls, 1951.) We can delimit the so called initial characteristics required of those who seek to fairly negotiate, and also the rules to be followed in that negotiation, so that the negotiation itself can be judged as ethical. Thereupon we can judge the resulting agreement as fair or unfair according to its consistency with the fairness criteria. This is a bifurcated process, i.e., the initial characteristics of the negotiators pose one set of criteria, and the characteristics of the actual negotiations pose another. Both sets must be applied.

The material presented here poses an ethical norm for management-stakeholder relations; it offers a contribution to the stakeholder literature concerning ethical norms. This norm of fairness in negotiation presents a theoretical mechanism for indicating various violations of the above mentioned justice. For example, reciprocity is an important issue concerning fairness. Such reciprocity might affect the long-term performance of the firm so that clarity as to violations of this aspect of fairness are important. The fairness in negotiation material provided in this chapter should assist in achieving this clarity of potential violations.

The structure of this exploration

The arrangement of the remaining material of this chapter proceeds through three subsequent sections. As with Rawls (1951, 1958, 2001), fairness in negotiation is envisioned as resulting from a Kantian categorical imperative process (CIP), previously reviewed, and from which the duties of this fairness follow.

In “Section 2,” the requirements for the negotiators, and the posed rules are presented. Note that this combination of (i) requirements for negotiators, and (ii) rules for negotiations, follows the organizational style of Rawls (Ibid). Various special situations of negotiations over risk are also analyzed.

In “Section 3,” compensation considerations for situations when violations of the rules of fair negotiation must occur are analyzed. In “Section 3,” the contributions of this fairness theory to the existing management literature are reviewed.

2. Objectives, Negotiators, and Fairness Rules

It is important to realize that the rules of fairness presented below pose practical norms usable for comparison with actual negotiations in order to perceive degrees of unfairness. For this purpose, we note that in Kantian theory, practical moral maxims are derived from the categorical imperative process (CIP). This process would derive maxims, or rules, that apply to business negotiations. These practical rules must generally be consistent with the CIP, as posed in the following criteria:

· The required characteristics of the negotiators, and the rules of the negotiations must apply to all participating parties (a universality requirement).

· All parties must be autonomously allowed to pursue their own ends in that they do not submit to paternalistic decree; there is no coercion; and all affected parties are equally free to participate (a requirement of respect for the dignity of those affected).

· All negotiators pursue a final harmonious stable settlement as defined here. This means that all affected by the agreement believe they have benefitted by a fair, moral process (a requirement of pursuit of a moral community).

· All negotiators have a factual basis for fully intending to fulfill their agreements (a requirement of trust).

When we apply the notion of harmony to an organization, we mean a state of all the organization’s members cooperating in pursuing the moral maxims established. In this context, harmony in negotiation requires that each negotiating party respects the other’s pursuit of their own ends. This requirement applies even when negotiations occur among management and external stakeholders such as customers and community interests. Each party pursues Kant’s proposition of mutual dependence as presented previously. This requires, as an example, that every non-owner stakeholder respects the interests of the share owners, who in turn respect the interests of the other stakeholders.

Kantian notions of ethical negotiators

If in these negotiations all maxims consistent with the categorical imperative and derived from the CIP are met, then we can claim that the resulting agreement can be said to be “fair and ethical.” To reach this classification, both the negotiators, and the methods of negotiation, must meet certain requirements. In particular, the negotiators themselves must meet the traits listed below. This list expresses the (i) capabilities, (ii) inclinations, and (iii) determination we expect of a negotiator. The first four traits are those that we as individuals would require of anybody representing us in some negotiation, the fourth and fifth express our demands for their moral character.

1. Innate ability characteristics: The negotiators must have at least average intelligence and must also have a predisposition to apply inductive logic to reach an agreement.

If someone is to represent us or others in negotiation, we would certainly require that they have the intelligence and logical skills to negotiate effectively. That is all we are trying to assure by this characteristic.

2. Knowledge characteristics: The negotiators must have a requisite knowledge of the issues to be negotiated.

Effective negotiation is hardly possible without knowledge of the issues at hand.

3. Conflict of interest characteristic: The negotiators acting as agents must either be free of conflicts-of-interests that would inhibit their ability to represent the interests of the principals, or openly acknowledge these conflicts to all affected parties.

We would not want a negotiator who represents us to have a conflict of interest that would bias the settlement against us. By the universality requirement above, we should not want a negotiator with an undisclosed conflict.

4. Objectivity characteristic: The negotiator must have a predisposition to consider all relevant information, including any new information, without any prior bias.

Negotiations can be lengthy and complex, with new data brought to the table at any point. Negotiators must be sufficiently open-minded and flexible to adapt and to analyze any new information objectively.

The latter two traits are those required to assure the pursuit of a moral community.

5. Noble nature: The negotiators must have the noble nature of voicing their reflective ethical reasoning among interested and affected parties.

The negotiators must not be willing to negotiate for an unethical result. For example, the guidelines of the categorical imperative must not be violated. Without the noble nature being a characteristic of at least one of the negotiators, it is very possible to reach an agreement that violates the categorical imperative. This “nature” is therefore essential for the moral character of a negotiator.

6. Sympathy characteristic: The negotiators must have sympathy for the pain and misery of others.

This trait of “sympathy” really goes along with #5. It might motivate the noble nature referred to above. It is, however, more Hume than Kant. Habermas (1999) argues that the Rawlsian requirements are deficient in that an additional requirement restricting the form of the deliberations must exist, namely all parties must be capable of and exhibit empathy for each other’s situation. This position, however, appears to be possible so strong as to eliminate any circumstance when fair rules would apply. The author is not this pessimistic in that managers and stakeholders might be able to haggle towards sufficient fairness under the first five posed rules. Nevertheless, this sixth rule is listed here as possibly useful or perhaps necessary.

In addition to these prior characteristics, managers must initiate the negotiations with the pursuit of objectives that are ethically appropriate for shareholders and all other stakeholders. These objectives of fair negotiations are explored next.

Objectives of Fair Negotiation

The objective of fair negotiations should be to reach a stable agreement (defined here) from which all affected parties expect to benefit.

Definition of stable agreement

A stable agreement is one that all parties accept and that exhibits Pareto optimality. It persists until the relevant information and/or circumstances change.

A Pareto optimal solution is one for which any further bargained movements leave at least one party worse off. To assure this, the negotiators should have the characteristics reviewed above. They must also follow certain procedures that facilitate an unbiased result; and also have all affected parties represented in the negotiations. The idea is to ultimately reach a Pareto optimal solution that leaves all affected satisfied.

Generally, there is a myriad of negotiated solutions that fit Pareto optimality where all parties benefit as compared to their initial positions. Through these negotiations, it is possible to achieve some single position within a range of possibilities that are all Pareto optimal and that have all parties better off as compared to their initial positions. The exact final position within this range, however, is achieved through the relative bargaining abilities of the parties involved. This is an important concept since in this sense, the rules listed below could be followed and there still could be a relative winner and loser with one party getting more of the division than the other, but as compared to their original position from where bargaining began, both parties benefit.

To achieve any Pareto optimal position that is acceptable to the parties, three necessary conditions must be met:

· there is no informational disadvantage for any of the parties,

· there is no clear deception on the part of any negotiators,

· none of the negotiators exercise coercive power over the others.

These necessary, but not sufficient, conditions are contained in the suggested rules presented in the next section. Their relevance and applicability for stakeholder negotiations, particularly market-based negotiations, is of paramount importance for stakeholder theory.

Seven posed rules of fair negotiations

To establish rules of fair negotiations we can borrow some concepts from Rawls (1958, 2001). A system for these negotiations should involve

· competent moral judges (defined above) who deliberate from freedom, equality, and rationality,

· reasonableness in that the negotiations would lead to similar results under similar circumstances involving other competent moral judges,

· negotiators who engage in sufficiently sociable conduct to reach a “reasonable” result. (See below for a definition of “reasonable” as used here.)

These rules ultimately require institutionalization in that they become standards for the various market-based negotiations and the face-to-face manager-to-stakeholder negotiations. The objective is to reach stable agreements that are expected to benefit all the involved constituents. This expresses the notion of “reasonable” as it is used here.

This section suggests seven rules of fair negotiation as derived from the three points presented immediately above. Their applicability to stakeholder negotiations, especially market-based negotiations, are reviewed where the complexities resulting from factors such as the “power to negotiate,” and the “inclusion of all affected parties” are addressed.

1. There is no deception involved in the negotiation.

It is clear that the rule prohibiting “deception” is required of Kant’s formula 2 of the categorical imperative. Deception is essentially a lying promise which is one of the five maxims Kant offered (1785, 4: 421-423) as examples. Deception may be a “bait and switch scheme,” or a purposeful reneging on the agreement to trade. In any case, it certainly violates Kantian moral maxims. It therefore must form one of the rules of fairness. It poses a perfect duty.

2. The counter parties are not disadvantaged due to any inequality of information access.

Rawls (1958, 2001) terms this rule “the publicity requirement.” The rule for equality of information access is theoretically essential for fair negotiations, but this rule is often especially difficult to meet in practice. Even if all negotiating parties have equal access to the same information, some might still interpret the information in a biased manner. The rule, if followed, can only assure equal access, not equal use. We can say, however, that this rule is necessitated by the universality requirement of the categorical imperative. No individual would willingly accept an information disadvantage in negotiation. They therefore must accept a moral maxim that all be equal in access to relevant information. This rule is obviously also required by the formula for the respect for the dignity of others. We cannot keep to this formula while knowingly having important information that our negotiating counterparty does not have. Also, those who are serious in their motivation of pursuit of the kingdom of ends will reason that this pursuit is not possible from negotiations that do not begin with a level informational playing field. A stable Pareto optimal equilibrium is not likely to be reached without this rule since the party without access is likely to feel cheated by the result.

This rule appears at first to be a perfect duty, but situations might require limits when denial of information access is required for other ethical reasons. There may be situations when imperfect duty is required to offset these unavoidable consequences. These situations are addressed in the section below titled, “Compensation Criteria When Violations of Rules are Unavoidable.”

3. The counter parties are equal in power to negotiate so that no coercion is possible.

Power is the ability to control outcomes. With respect to negotiation, the only ethical outcome worthy of managerial power is fairness. Coercion in negotiation must be avoided given our fairness concept.

There is a perfect duty to avoid coercion, but some perceptions of coercive possibilities may be present for which negotiators have an imperfect duty to dispel. For example, consider negotiations between parties 1 and 2, and allow them to negotiate over the distributions of good A. Party 2, however, perceives that party 1 could deprive him of another good B depending upon the results of the negotiation, yet good B is not explicitly being negotiated, and party 1 would not use good B in this way. These two parties are therefore not equal to negotiate assuming good B is valued by party 2. Party 1 has an imperfect duty to dispel party 2’s misperceptions. This is an imperfect duty because there are practical limits to party 1’s efforts.

For another but more precise example, consider the case of the employee who has considerable employment years at some company. Allow the employee to have one more year until retirement. If the employee is fired before retirement, however, then all retirement benefits are lost. Can that employee negotiate effectively over his/her work schedule? Not unless the employee is assured of no undue threat (above the norm for this work) of being fired. To be equal in negotiation, management would need to assure the employee that there is, and there will continue to be, no coercion used. The employee must be assured that within any constraints established (constraints such as “you must work 40 hours per week, and as with all other employees, some hours must be worked at night, or on weekends, etc.”), they will be treated fairly in comparison with other workers within a clearly established seniority system.

In stakeholder negotiations, sensitivity to not using coercive power is a requirement of management. Managers might actually have coercive power, or just be perceived as having this power. In either case, a fair outcome may not result. To be fair, all negotiating parties who do have coercive power must assure their counter parties that this power will not be used. This is an imperfect duty. More will be expressed about this below where issues of countervailing power are addressed.

4. The counter parties are free to negotiate; there are no legal or other encumbrances on their authority to bargain and reach an agreement.

All parties must be aware of any legal restrictions on other negotiators. The negotiator cannot negotiate away property rights or compensations that are not fully owned or controlled. It might be argued that such a situation could be subsumed under requirements 1 and 2. This appears to pose a perfect duty, but in some complex situations of legalities, a “prudent person” rule might apply involving an imperfect duty to explore if there actually are any encumbrances.

5. Every party that is affected by the negotiation is equally represented in the negotiation. There are no externalities resulting from the agreement.

This fifth rule should stand alone although it is related to the fourth rule. It is certainly not fair that two parties negotiate a negative externality imposed on a third party such as “Let you and I agree to dump our garbage on the property of our neighbor.” At least, we cannot negotiate this without the neighbor fully participating in the negotiation and be compensated accordingly. All parties affected must have the opportunity to participate equally in the negotiation. Without this rule, we could hardly state that any of the three formulae of the categorical imperative would be followed.

This might be a difficult requirement to meet with market-based negotiations since the negotiating parties might not have a reasonable basis to know of the existence of some affected third party. The notion of “reasonable basis” is an important concept here. When the requirement is inadvertently violated, perhaps ex post compensation is warranted, and this would itself be subject to additional negotiation. Such a situation is addressed below. Other than the situations of assuring the “reasonable basis” (an imperfect duty), this requirement poses a perfect duty.

6. The counter parties communicate and explore various options for negotiations.

Negotiators need to communicate possible Pareto movements (bargained outcomes that move towards Pareto optimality) in order to actually reach an agreement. Rawls (1958, 2001) requires this under the umbrella of being “reasonable and rational.” This actually follows, however, from the logic requirement for negotiations. Logic dictates that the negotiators communicate various possible solutions. This requirement, however, also eliminates laziness on the part of negotiators, i.e., they could be logical but lazy, and as a result of this laziness, no Pareto movement occurs although some are possible, but not discovered by the lazy efforts of the negotiators. This requirement poses an imperfect duty since it is one of “how much effort to expend” to discover Pareto movements.

It is important to realize that these six rules of fairness do not assure that Pareto movements occur. A typical problem occurs when one or both of the counter parties stick to preconceived notions of a fair-terms of trade (the price of one good or service in terms of the other), but the preconceived notion would not yield a Pareto movement. Consider a man walking through a farmers’ market looking to purchase an apple. This shopper might have preconceived notions as to a fair price for the apple, and this price is based upon previous purchases over previous days. Either the demand or the supply, or both, however, have changed, and the market-clearing price has risen. If the shopper has sufficient time to explore among the various dealers, he may be able to reform his notion of what a fair price is, and perhaps be able to make a deal with one of the merchants, but this involves time and effort, or using different phraseology, transaction costs in terms of time. These costs can prevent a Pareto movement in that without the preconceived notion of the mistaken price, the shopper may be willing to purchase at the higher market-clearing price, and still consider himself better off.

Consider, however, another sort of negotiation, one involving a union agent and a management agent representing the firm’s owners. Both begin with mistaken ideas about other wage settlements that are widely divergent. Given time and effort, they could explore previous and recent wage settlements, and perhaps reach some notion as to an agreeable wage. Fairness demands that these agents explore this information even though transactions costs involving time spent and perhaps other resources, could be involved.

Transaction costs can inhibit a wide variety of useful bargaining. For this reason, we should consider a seventh rule of fairness.

7. The negotiating counter parties must not impose unnecessary transactions costs as a bargaining tool for the purpose of obtaining coercive power.

One can argue that this rule is redundant in that the combination of the first six rules implicitly contains the seventh. It is important, however, to indicate the importance of transactions costs for inhibiting Pareto movements, and so it is perhaps worthwhile to isolate this rule. A negotiator can try for advantage by delaying the negotiations, or in various ways make the negotiations uncomfortable. The belief is that by perpetrating these delays and inconveniences, the counter party is worn down, and is willing to accept less advantageous terms. Fair negotiations, however, require that all counter parties attempt to limit and reduce the transactions costs associated with the negotiations, and do so for all parties. This rule poses a perfect duty. In fact, negotiations can be very complex and occur in lengthy stages. The first stage is often over the conditions utilized for latter stages. It is at this initial stage that negotiators are required to help facilitate a low transactions cost Pareto movement.

An example of transactions costs being exploited to obtain unfair advantage are frequently observed in legal tort suits. Lawyers often demand very lengthy depositions that are cumbersome and expensive in time and legal fees, and that are primarily just expensive delaying tactics. These tactics are really adversarial in nature, and are not aimed at having both parties better off, but rather at having one party win while the other loses. For these legal cases, transactions costs are used as a weapon, and violate the rules of fair negotiations except we should realize that these rules of fairness are not meant to apply to adversarial proceedings. We might, however, explore applying some rules of fairness to the system of legal adversarial proceedings, but that is not examined here.

Definitions of fair agreement and extent of negotiations

There are two important and useful concepts for this analysis that are addressed here. Consider two questions:

1. Once negotiations have begun, if the rules of fairness are maintained, must any bargaining agreement result in a Pareto move?

2. If negotiations continue under the rules of fairness, will a Pareto optimal position eventually be reached?

It has been argued so far that the answer to both these questions is “yes!” This is one of the purposes of this exploration of the fairness issue: fairness facilitates both the continuance of negotiations and the ultimate achievement of a Pareto optimal position. Such a position, where all parties are better off and no additional bargaining would be beneficial to each, promotes a continuance of harmony and stability (defined above). As a result, the following definition is useful:

Definition of fair agreement: A fair agreement is one agreed to by all affected parties, and that has been reached according to the rules of fair negotiations.

It might be argued that the negotiating parties could start with some initial position, meet all rules of fair negotiations, and move to some position that is not strictly a Pareto move, one that leaves only one person better off, but the other no worse off. One must ask the question, however, “Why would the person who is not better off agree to the move?” Was coercion involved, or some other violation of fairness? Perhaps some other side agreement was reached that left the apparent no-better-off negotiator actually better off? This is a particular problem that involves what is termed the extent of the negotiation, and is explored here.

The answer to both questions, however, must be “It is not possible!” If the rules of fairness are followed, then all parties will inevitably be better off, and therefore harmony must be facilitated assuming all understand what exactly is being settled. We mean by this that if stakeholders, internal and external, have an a priori disposition to pursue Kantian harmony, then following the rules of fairness, they should inevitably be left better off as a result of the negotiations. They should therefore not be left frustrated. Their disposition to pursue harmony should result in a stable agreement. The following definition concerning the extent of the negotiation is therefore relevant and applicable.

As indicated above, negotiations are often multi-dimensional. Rather than simple negotiations over goods A and B, they may also be over C, D, and E, all simultaneously to be settled. For the purpose of avoiding misunderstanding and consequent frustration, it is therefore useful, for us to define the range of goods subject to the negotiations.

Definition of extent: The extent of the negotiations consists of both the positive and negative goods to be distributed by the negotiated agreement. (A “negative good” is one that is undesirable; a “positive good” is one that all negotiators desire.)

A principle problem occurs if there is no clear understanding as to this extent of the negotiations prior to reaching the agreement. This is a problem that frequently occurs; one that can lead to considerable frustration and anger, and therefore an unstable agreement. The problem has considerable potential to disrupt the organization’s harmony.

To clearly understand this problem, we use the employment negotiation example referred to above. In this example, a manager negotiates with an employee over the hours of employment. The manager understands the negotiation to be narrow in that it only concerns the hours of employment. The employee mistakenly believes, however, that a willingness to accept difficult hours improves his possibilities for promotion. The manager does not make it clear that the hours negotiated will have no impact on the employee’s potential for promotion. The negotiations continue for some years until the employee erupts in anger due to frustration over not being promoted, all because the manager did not make the extent of the negotiations clear. Any sort of harmonious cooperation from the employee is now difficult to achieve, or to even expect. The employee feels cheated, and is not likely to subsequently concern himself with the moral maxims management preaches. He sees management as hypocritical.

Market-based negotiations, such as with employees seeking initial hiring, or suppliers seeking initial contracts, are typical examples. One side of the implicit negotiations expect more favorable arrangements once the initial contract is reached (future advancement opportunities, or additional contracts after the original). Explicitness in the initial negotiation contacts can, perhaps, avoid stakeholder frustration.

Negotiating the special case of risk

One of the special and important situations we should consider for fair negotiations concerns the question of who bears certain types of risk. These risk negotiations are sufficiently important to warrant separate indication and consideration here. They indicate the importance and complexities of stakeholder negotiations. By this, we mean negotiation between shareholders, as represented by their management agents, and other stakeholders. Each group desires a guaranteed result, i.e. guaranteed employment, guaranteed long-term supplier contracts, fully warranted customer products without expiration, etc. In fact, all non-owner stakeholders in one way or another negotiate with owners over risk. Some of these negotiations consist of the following:

1. Consumers negotiate product safety and reliability issues.

This is usually an implicit market-based negotiation. For example, consider the purchase of an automobile, either new or used. The consumer often negotiates over price and add-on amenities such as rust-proof coating, electronic equipment, paint color, etc. Warranty and service reliability issues are also subject to the negotiated package. The consumer’s objective is to negotiate a reduced risk of his or her expenditures on future service. The owner’s agent negotiates over the same issue. The price (wealth transfers) and associated terms are the negotiated instruments.

2. Debt holders negotiate indenture and default terms.

Borrowing funds is usually associated with complex legal agreements (the bond’s “indenture agreements”) that specify the recourse provisions in case of default (the “priority of claims”), and also various provisions that the bond holders require in order to limit the probability of default. The more restrictive these terms, the higher the price the market will pay for the bonds, i.e. the lower the interest rate the borrower must pledge to pay. These “bond indentures,” however, restrict the actions of management so that it is more difficult to pursue various opportunities. There is uncertainty associated with both the possible future opportunities that the firm may have to leave unexplored to maintain the indenture provisions, and also with the possibilities of financial distress (default). The negotiation is therefore over the division of risk-of-default between the borrower and the lender.

These negotiations are especially important with respect to the default risk of subsidiaries who are legal creations designed to bear risks independent of the parent. These risks may differ in nature (the potential cause of a default), and/or the probability distribution for default born by the parent entity. The parent typically “expresses an interest” in assuring that the subsidiary pays in full and on time, but makes no explicit legal pledge to bear this liability. To be fair and transparent, this limited obligation must be explicitly declared. (See Robinson, Medury and Shelor, 1991.)

3. Community interests negotiate employment externality issues.

Local governments often seek potential employers to move to their area. They negotiate by offering tax-break incentives for the promise of a certain level of employment. The amount of employment is often not entirely contractual in that there is some range of employment specified. Also, along with the tax breaks, the community often demands restrictions on externalities such as noise or the water pollution allowed. There is, however, always uncertainty as to the final outcome for employment and pollution, and hence there is risk for both sides. A guaranteed minimum employment-level in case the product market declines results in a wealth loss for the owners. Granting tax breaks when employment is not as high as expected, or pollution is higher than expected, means a wealth and welfare loss for the community.

In a manner similar to negotiations over default risks and recourse provisions with debt indentures, the risk provisions for community agreements are seldom tight. Both community stakeholders and shareholders therefore bear risk.

4. Employees negotiate employment guarantees.

As with the case above, union negotiations often concern guarantees for employment versus the wage rate. The commitments for employment are often conditional in that they specify who is to be laid-off first in case of distress. Both parties bear uncertainty. If the product market declines, the owners must uphold their commitments and therefore they suffer wealth losses that are greater than if no commitment is made. The employees try to lower the risk of layoffs, but in return, they must make wage concessions, i.e. they give up wealth for greater certainty of employment. The owners have similar opposite tradeoffs.

It is natural for owners to want others to bear their business risk, while other stakeholders want the owners to bear the risk. Wealth transfers are generally the negotiating instrument in that the shareholders communicating through management negotiators are often willing to give up some wealth in return for the other stakeholders bearing more risk. The wealth transfers might be in the form of higher salaries for employees, higher tax payments for community interests, higher rates of return for debt holders, etc., but these stakeholders bear some of the business-related risk.

In negotiated agreements concerning who bears risk, the ex post results will appear to indicate that someone losses and someone wins, but like insurance contracts, these agreements can a priori benefit all in an ongoing sense. If the disaster occurs, the insurance appears to benefit the one insured, but elimination of ongoing risk is beneficial even when disaster does not occur. If otherwise, one would not enter the insurance contract. All can benefit from stable freely-negotiated agreements that settle the bearing of risk in exchange for compensation.

3. Violations of Rules and Compensation

As reviewed in detail above, fairness requires an attempt to leave both parties better off as a result of the negotiations. Conducting fair negotiations with multiple counter parties, however, can be problematic when interests within one of the negotiating groups are divergent. How can one assure that a minority will not be hurt while the majority is better off?

Negotiations with multiple counter parties

For example, consider the case of a manager negotiating with a union of employees. The negotiations might be over the wage versus benefits package. It is easy to claim that the problem is eliminated through an “a la carte” package-offer where employees select their optimal package, but benefit packages seldom are sufficiently flexible to benefit all. Often only two or perhaps three packages can be offered. The union employees may be segmented in interests due to age, gender, or other characteristics, while each segment has different preferences. It is certainly possible that one segment could actually be hurt by the new settlement agreed to by majority vote. For a possible example, consider the situation of childless older or single employees appearing to subsidize the insurance premiums for those employees with children.

With group negotiations, we can revert to Rawlsian analysis to explore issues of representation within the group, i.e. are group members being coerced by other group members? Is information equally assessable to all? Are decision and voting rights equal within the group? To the extent that management has any influence over these, or other fairness issues involving the group dynamics of the counterparty, management should attempt to ameliorate these fairness issues, not by forceful decree, but by negotiation. It is often the case, however, that management has no such influence.

It is important to remember that Kantian harmony within the counterparty group is likely to be in the long-term interests of the shareholders. It can be short-sighted indeed to try to exploit counter-party group dynamics in such a way as to prevent each group member from being better off. Why would this be the case? The answer is that conflict is likely to lead to disharmony and inefficiencies within the organization. Hahn (2004) and Bosse, et al, (2008, 2009) indicate reciprocal attacks on the efficiency of the firm when unfairness is perceived. Such settlements are therefore not stable. These issues often involve the development of what we term countervailing power.

Power abhors a vacuum, and this is especially true when negotiating power positions. Counter parties who perceive themselves as weak will certainly be dissatisfied with the outcome of any negotiations. Disharmony results when stakeholders are less likely to contribute to firm performance, but rather they might attempt to frustrate firm efficiency as a psychological reaction to believing they are weak. Even if the counter party does negotiate a position that leaves them better off, the belief that they are weak is likely to solicit a response that they could have done better. This frustration manifests a desire to seek some sort of power leverage, either by banding with other counter parties, or by seeking some position prior to negotiation that management must respect.

To obtain a team-like atmosphere where counter parties believe they have an interest in seeing the success of the negotiation and the firm, counter parties need a sense of power and ownership in the firm. To the extent that this power and ownership facilitates cooperation and therefore the interests of the shareholders, then it is obvious that management should not resist this development of countervailing power.

As an example of this, consider negotiation with a community over possible tax breaks, transportation roads, or other amenities beneficial to the firm. Perhaps the firm has considerable leverage over this community in that if the firm withdraws its facilities, the community would be severely hurt. Management negotiators, however, must keep in mind the political power the community might have in the future. Using its current political power in current negotiations could lead to a disgruntled community that manifests disharmony, and attempts to hurt the firm in the future. A management team that attempts to intuit and decree a solution of what it perceives as fairness need not ameliorate this disgruntlement. Allowing the community to at least act as though they have power in negotiation, or perhaps allowing the community to develop countervailing power so they can more properly represent their longer-term interests, is more likely to lead to an harmonious and therefore stable agreement. It is easy to perceive that this could be in the interests of the shareholders as well as other stakeholders.

Another example considers the pre-packaged bankruptcy problem. Modern bankruptcy is frequently pre-packaged in that lawyers negotiate with debt holders prior to legal filing in bankruptcy court. The negotiations are over debt reductions, changes in indentures, changes of debt to equity ratios, and the like. The firm’s legal representation generally argues that a pre-packaged agreement is in the wealth interests of all parties in that a lengthy court proceeding would erode the value of the firm’s assets, and therefore the value debt holders would eventually receive. Given these negotiating tactics, an agreement is often reached; bankruptcy is then legally filed; the agreement is court approved; and the legal proceeding is quick. Frequently, all (or at least almost all) negotiating parties do benefit as compared to enduring a lengthy court proceeding.

The prepackaged negotiating does allow a degree of power over otherwise holdouts who try to achieve a free rider benefit. A debt holder might decide that by being the last holdout to the agreement, or one of the last holdouts, she can achieve a better settlement than others who have already agreed. The pre-packaged negotiations, however, generally achieve agreement amongst almost all parties. The court, then seeing that few disagree, approves, and all must accept the agreement as negotiated.

The problem, of course, is that if the legal representation is overly vigorous in their power to negotiate the debt write-down, then the firm will suffer in the future when it reissues securities for sale. Investors will be wary about the firm’s securities in that investors fear the firm might again vigorously negotiate for a prepackaged relief from the original pre-bankruptcy stated terms. The firm should recognize the countervailing power of debt investors, that is that they may be coerced into a weak position now, but they may refuse to purchase the firm’s future issued securities. This recognition may well reflect the future shareholders’ and other stakeholders’ interests.

One could easily develop other examples, perhaps union negotiation examples, or supplier negotiation examples, to further illustrate the dangers of management exercising temporary coercive power in these activities. Conducting all negotiations by following the rules of fairness can clearly assist management in multi-party negotiations. In this sense, Kant’s notion of achieving harmony, although we use this notion in the context of stakeholder relations rather than society overall, may be in the interests of all stakeholders including shareholders.

There are, however, certain criteria for multi-party negotiations which can be used as aids for assuring that harmonious results are achieved. These criteria are borrowed from the theory of welfare economics. They are presented and explored next.

Criteria for multi-party negotiations

Consider management negotiating with a multi-party group. Assume that a potential negotiated movement would apply to all in the multi-member group within which there are both winners and losers, and that there are no income or wealth disparities within this group. Under these circumstances, there are three criteria offered in the welfare economics literature that we can use:

1. Kaldor criteria: If within the multi-member group, winners compensate losers sufficiently to make them better off so that as a consequence all within the group are better off, then this settlement is a Pareto move.

2. Hicks criteria: If within the multi-member group, the losers are willing to compensate the winners sufficiently to prevent the move, and as a consequence the losers would still be better off, then the settlement is not a Pareto move.

3. Scitovsky criteria: If winners must compensate losers sufficiently to leave them better off, but losers cannot compensate winners sufficiently to prevent the move, then both winners and losers are better off, and the settlement is therefore a Pareto move.

To illustrate these criteria, consider management negotiating with an employee union. An agreement is proposed, but some union members would be worse off as a result of this proposed agreement while the majority would be better off. The union, however, is willing to shift a sufficient amount of dues to the losers so as to compensate them and leave them better off, and the amount of redistribution still leaves the majority better off with the proposed agreement. This illustrates Kaldor’s criterion.

By Hick’s criterion, we must allow consideration of the losers in the union compensating the winners to prevent them from accepting the agreement. If the losers can compensate sufficiently (recall from above that there are no income or wealth disparities by assumption), then we cannot claim that the agreement serves the general interest of the union. By Scitovsky’s criterion, however, if the winners can compensate the losers sufficiently, and the losers cannot compensate the winners sufficiently to prevent the move, then the agreement is contracted, the winners compensate the losers (losers need not compensate the winners), and we are assured that all are better off.

Whether or not compensation must actually be paid is a controversial issue in welfare economics. It is generally claimed that compensation need not actually be paid, but only that if it could be paid and be sufficient to leave all better off, then social welfare is enhanced. For our case of examination of fair negotiation, however, it should be apparent that compensation be paid in order to leave all parties better off. This motivates an eighth rule of fair negotiations, one that applies only for multi-member group negotiations:

8. Fair multi-member negotiations require that the Scitovsky criteria applies, and that winners compensate all losers sufficiently to have all members better off.

If rule #8 is maintained, then the negotiated move must be a Pareto move. Continued negotiations should lead to a Pareto optimal position.

Issue of trust in negotiations

Van Buren III (2001, p. 487) argues that the existence of power differentials necessitates stakeholder theory as we know it. Low-power stakeholders are those with limited ability to affect the firm. High-powered stakeholders can affect the firm in such a way that the firm would strongly desire to fulfill any agreement reached with them less it would suffer substantial consequences. The latter group of stakeholders need not worry about trusting the firm’s intentions. The former group needs to worry. Low-power stakeholders have a lack of choice and are more likely to be coerced into an agreement because of this lack of choice. Their consent is not entirely given freely due to this lack of choice.

Low-power stakeholders must rely on “organizational trust.” Organizations have three characteristics that determine this trust:

· The organization must be perceived as having the ability to fulfill its agreements.

· The organization must be perceived as having the intentions to fulfill its agreements.

· The organization must be perceived as having a record of integrity in fulfilling their agreements so that its intentions are considered probable.

These trust factors, therefore, affect the ability of the negotiating parties to reach fairly negotiated agreements. Because of the coercion issue, compensation criteria may apply to low-power stakeholders as reviewed below.

Trust in negotiations is the basis for fair settlements. For example, parties are not likely to reasonably negotiate if they perceive that the rules of fairness are being violated. Agreements can only be Pareto and stable if based on trust. The rules can facilitate these agreements, but trust is the basis.

Compensation criteria when violation of rules is unavoidable

Consider cases when some of the rules of fair negotiations are unavoidably violated. As an example, these situations might apply to rules #2 or #6, as repeated below:

The counter parties are not disadvantaged due to any inequality of information access.

The counter parties communicate and explore various options for negotiations.

These two rules, listed above, might be unavoidably violated. For example, consider the example of a company that desires an expansion in productive plant, but this expansion requires purchase of real estate as required for the new plant. The firm’s management is constrained from announcing this expansion because of competitive reasons, i.e., because it does not want its competitor firms to yet know of this planned expansion. An additional reason for temporary secrecy would be that if the firm is to purchase the necessary real estate parcels without a radical increase in price, it must do this quietly, one adjacent parcel at a time. To make this problem more realistic and interesting, also allow the real estate where the planned expansion is located to be depressed so that prices are very low. The real estate market does not realize that a change in usage from residential to industrial is likely.

We note that this situation violates the equality of information rule, and also the rule concerning exploration and communication of various options. These rules are violated due to the rational economic need for secrecy.

Knowing that the negotiations cannot be entirely fair, what can the management negotiators do? We argue that the answer lies in the Scitovsky criteria. For any agreement where the two rules of negotiations indicated above must be violated, the management negotiators must have a prior expectation that the following compensation rule will be met:

Compensation rule for violation of rules of fairness: When the rules indicated above must be unavoidably violated, the fair agreement requires an expectation that ex post, compensation will be paid by those who benefit to those who lose. Only if both negotiating parties are expected to be better off after the compensation can the negotiation be deemed fair.

For the plant expansion example explored above, this compensation rule requires that management must form an expectation of the real estate prices if the expansion plan was known by all. Management must expect that it can and will be able to further compensate the real estate sellers once the expansion is completed. Of course, the expansion project must be judged as worthy even after the compensation is paid in order for the firm to proceed. With the necessary compensation, the real estate sellers will not believe they are cheated. The community interests will not feel frustrated, and a Kantian harmony can continue. Given that the purpose of the norm posed by the rules of fair negotiation is to discern unfairness and to suggest its consequences, this real estate example illustrates this objective.

As effectively argued above, managerial pursuit of Kantian harmony through fair negotiations with stakeholders is clearly preferable to a subjectively established managerial decree aimed at stakeholder balance. A lack of harmony leads to the sort of frustration that disrupts cooperation among stakeholders, and this disruption is not likely to enhance any measure of firm performance. We must recognize, however, that there are instances when this pursuit is not possible.

For example, there may be proprietary information relevant to the negotiations that management cannot share with counter parties. Also, management may be in an authoritative position over the counter party, and this is unavoidable. When these aberrations of the rules occur, management cannot act strictly in the interests of shareholders even though they are the agents of the shareholders. The obligation of management under these circumstances is to attempt to assure a Pareto movement, and perhaps achieve what they envision as a Pareto optimal solution, as though the rules were able to be followed. This final solution may be judged as unfair by some or all of the counter parties, but there is no other possible ethical action on the part of management but to try to reach this solution. Management can only hope that through time the solution will be eventually judged as fair after all the information is discovered. The compensation rule reviewed above may be necessary to assure these Pareto moves.

There is also the situation when low-power stakeholders believe they have no choice but to accept an agreement. They might believe they are coerced into accepting the terms. To establish a stable equilibrium and to achieve a Pareto move, it may be necessary to offer terms that management would anticipate would be established under a more competitive circumstance, i.e. if there were more competitors for the services of the low-power stakeholders. This perhaps offsets the possible coercion. The compensation criteria applicable to this low-power stakeholder problem would be fair, and be sufficient to provide a Pareto move given management’s search for a stable agreement with constituents fully performing their obligations.

4. Fairness in Negotiation and Management Theory

In order to fully perceive the contribution of this theory of fair negotiations, we might ask, “Where does the concept of fairness in negotiation fit within the body of management theory?” The history of the last century’s various academic schools of management shows that prior to the stakeholder approach, each strain (or school) of thought primarily focused on matters of efficiency, but secondarily concerned either distributional or procedural fairness. These held an implicit assumption that the former (efficiency) might follow from the latter (procedural fairness).

Management theory and fairness?

With respect to this question, Van Buren III (2008) reviews five mainstream approaches to management as they evolved over the last century: (i) scientific management, (ii) administrative management, (iii) bureaucratic theory, (iv) human relations theory, and (v) human resource theory. Each of these schools offers insights into aspects of fairness that are relevant for the negotiation issues of concern here. Each is briefly reviewed below for this relevance.

Scientific management focused on increases in efficiency. The benefits of increased efficiency were envisioned to be partly used as incentives for factor inputs to become more efficient. This concerned distributional fairness, but not procedural fairness in that the distribution was theorized as left entirely to management’s discretion. Scientific management did not address stakeholder input to the management process, nor the stakeholder concerns of suppliers, customers, or community interests. (Ibid, pp. 634-635)

Administration theory proposes that employees need and want to be managed. The theory is essentially paternalistic. Bureaucratic theory, however, emphasized procedural fairness through impersonal rules. Distributional fairness is assumed to follow from these impersonal procedures, but employee input to management is also not addressed in this theory. Human relations theory emphasizes that employees organize into informal groups to influence the firm’s structures and task assignments. This theory’s view is that paternalistic management of these groups is necessary, but it does not provide an input process from employees to managerial decisions. Human resource theory emphasizes management of the individual with institutionalized compensation structures. Neither human resource nor human relations theories provides structures for employee input to the management process. (Ibid, pp. 635-639)

The fair negotiation contribution

Each of these five schools of management thought has a missing element – a lack of attention to customers, suppliers, and community interests. This is addressed through stakeholder theory. (Ibid, pp. 639-642, and Phillips, 2003) The theory of fair negotiations provided above, however, provides procedural justice to stakeholder relations; it addresses the issue of distributive justice through a fair-market process with remedies for violations of this process; it solicits stakeholder input on the non-management side of the negotiations; and it allows for discretion on management’s side of the negotiations. It recognizes and demands autonomy for all stakeholders. It is based on the ethical maxims derived from the categorical imperative process. It therefore provides clarity to the flaws contained in the management theories reviewed in this section.

Rawls (1951, 1980) used Kant’s categorical imperative process to derive the conditions under which a negotiated social contract could be said to be fair and therefore just. This demonstrated that the Kantian categorical imperative process theoretically provides fairness with respect to social processes. It facilitates an understanding of where and when violations of fairness occur with respect to this processe. This is how the proposed set of Kantian rules of fair negotiations is used in the context of stakeholder theory. Because management is usually bonded to the interests of shareholders, it bears a conflict-of-interest. Therefore, management cannot paternalistically decree its notion of a stakeholder balance solution for the distribution of the firm’s proceeds or other concerns, and still have stakeholders in general consider this decree as fair. Even without a conflict of interest, a management decree without an open process of input would be considered paternalistic and unfair. The fair and moral solution is for management to negotiate with stakeholders in an open, non-coercive, non-deceptive way. The set of rules of fair negotiations reviewed in this article is designed to pose a clear norm that facilitates an understanding of what an ethical stakeholder-balance solution might be. Fair negotiation avoids the paternalism of managerial decrees however moral management’s intentions might be.

The suggested rules for fair negotiation also provide clarity as to when unfairness occurs. When violations of the rules must occur due to the ethical requirements for secrecy, or in negotiations with low-power stakeholders, or other problems, the rules suggest the possibility for fair solutions involving either compensation, or when absolutely necessary, managerial decreed solutions governed by the expectations of what would have occurred if the rules did not otherwise need to be violated.

This chapter therefore poses a potentially ethical solution to the stakeholder balance conundrum where management paternalistically decrees a distribution of proceeds, opportunities, or other benefits. It is Kantian in its preservation of the autonomy of the various stakeholder constituents. It envisions management and stakeholders as negotiating even in the context of market-based processes. It furthermore provides clarity as to what unfair negotiations might be. It therefore poses a needed contribution to the stakeholder theoretical and ethical-normative literature.

� See the Clarkson Principles at Clarkson, 1995, and at � HYPERLINK "http://www.stakeholdersmao.com/principles-stakeholder-management.html" �www.stakeholdersmao.com/principles-stakeholder-management.html�.

� See Phillips, et al. 2003, p. 487. Also see Donaldson and Preston, 1995; Freeman, 1984 and 2010; Evans and Freeman, 1993; Greenwood, 2007; and more recently Hasnas, 2013 for reviews.

� See Freeman, 2002, p. 39.

� See the Clarkson Principles cited in footnote 1.

� Even if these compensation arrangements do not particularly bond management to shareholder primacy, they still create conflicts-of-interest for applying paternalism towards stakeholders.

� See the Clarkson Principles cited in footnote 1.

� Phillips, et al., 2003, p. 487, specifies these conditions for the stakeholder theory.

� An example would be some sort of tie-in agreement such as demanding illegal kickback payments, or other illegal actions.

� Coercion or deception are clear violations of the second formula of respect for the dignity of persons. See the next section.

� Hahn (2004) focuses on this “reciprocity” issue in an exploration of the issue of fairness with respect to stakeholders. Also see Hayibor (2017).

� See Chapters II and III for a full description of the CIP, and the use of terms such as universality, respect for the dignity, and the pursuit of the moral community.

� See Rawls, 1951.

� The Scottish philosopher David Hume (1711-1776) emphasized the effects of emotion (sympathy for the suffering of others) on ethical behavior. This is not a Kantian position where only reason should prevail, not emotion as a manipulator of reason. (See Broaskes, 1995, pp 377-381.)

� See the Edgeworth Box utility-maximization analysis in Henderson and Quandt, 1958, p. 204; Fereguson, 1972, pp. 467-473; and Maurice, et al., 1982, pp 548-555. See also � HYPERLINK "http://www.policonomics.com/edgworth-box/" �www.policonomics.com/edgworth-box/� and also www.digitaleconomist.org/ex_4010.html.

� This is illustrated by the Edgeworth analysis referred to in footnote 12.

� See Chapter 3.

� This can be considered a violation of rule #2, but it is important to fully consider the consequences of this problem in terms of the transactions costs involved as in rule #7.

� See Henderson and Quandt (1958, p. 219) and www.policonomics.com/compensation-criteria/.

� See Mitchell, et al., 1997.

� See Van Buren III, 2001.

� See Mayer, et al., 1995, and Bailey, 2002, and Evans and Freeman, 1993.

� See Blau, 1955 and 1956; Crozier, 1964; Merton, et al., 1952; and Weber, 1947.

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