NEW YORK UNIVERSITY ANNUAL SURVEY OF AMERICAN LAW VOLUME 68 ISSUE 4 NEW YORK UNIVERSITY SCHOOL OF LAW ARTHUR T. VANDERBILT HALL Washington Square New York City New York University Annual Survey of American Law is in its seventy-first year of publication. L.C. Cat. Card No.: 46-30523 ISSN 0066-4413 All Rights Reserved New York University Annual Survey ofAmerican Law is published quarterly at 110 West 3rd Street, New York, New York 10012. Subscription price: $30.00 per year (plus $4.00 for foreign mailing). Single issues are available at $16.00 per issue (plus $1.00 for foreign mailing). For regular subscriptions or single issues, contact the Annual Survey editorial office. Back issues may be ordered directly from William S. Hein & Co., Inc., by mail (1285 Main St., Buffalo, NY 14209-1987), phone (800- 828-7571), fax (716-883-8100), or email ([email protected]). Back issues are also available in PDF format through HeinOnline (http://heinonline.org). 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Editorial Office: 110 West 3rd Street, New York, N.Y. 10012 (212) 998-6540 (212) 995-4032 Fax http: //www.law.nyu.edu/pubs/annualsurvey For what avail the plough or sail Or land or life, if freedom fail? EMERSON iv NEW YORK UNIVERSITY ANNUAL SURVEY OF AMERICAN LAW 2012-2013 BOARD OF EDITORS Editor-in-Chief THEODORE KELLY Managing Editors JEFFREY R. BENGEL ANDREW OSARCHUK Development Editors Executive Article Editors Senior Articles Editor JOSEPH M. ENO MAx KAPLAN E. DANIELLE BYAM CARLY WEINREB DAVID KATZ CLIFFORD MARK LANEY Note Editors ROSE S. LEE PAUL CHAFFIN KEVIN EUNHO PARK Symposium Editor STEPHEN ELKIND KELLY STEPHANIE ROCHESTER PARKER JASON SCHEFF EMILY WINOGRAD DENNY WON Article Editors JOSE ACOSTA ELIZABETH B. JORDAN SOPHIE SAVRYN TAYLOR ALEXANDER ERIC KAMERMAN P. DAVID SEIBERT NICHOLAS AXELROD LORETTA LAu ELANA BROWNSTEIN SIEGEL AYAL BAINVOLL WILLIAM CLAYTON LAWRENCE SARAH E. SIEGEL MADELEINE EDDY BARENHOLTZ JUDD LINDENFELD, YOAV SIMCHONI ASHLEY PARKS BELTON MEGAN C. MANFRED JENNA E. SMALL JEREMY H. ERSHOW AVA McALPIN PAIGE CATHLEEN SPENCER KEVIN FRICK JAKE ORNSTEIN RIKlI STERN ANDREW J. GERSHON MATTHEW ROTBART CHARLES TANENBAUM GANARAJ S. HEGDE JESSE B. SACKS JORDAN WELLS LAUREN M. ISAACSON PAUL L. SANDLER KARI WOHISCHLEGEL Staff Editors SIOBHAN C. ATKINS MICHAEL F. GOON JULIA C. PILCER PAUL S. BALIK ALEx J. GORMAN JEFFREY A. RITHOLTZ GABRIEL BRUNSWICK JORDANA L. HAVIv ARYEH L. ROSKIES MARY BRUST PETER HuE THEODORE D. SAMETS MICHAEL A. CANENCIA. GAIL L. HYMAN ALEXANDRA SAMOWITZ JOSEPH M. CASTELLI NICOLE N. IDOKO NICHOLAS C. SCHOLTEN WALTER A. CIACCI CHRISTINE A. KUVEKE MELISSA B. SIEGEL ILYSSA L. COGHLAN HAROLD LAIDLAW AMANDEEP SINGH JOSHUA S. COHN CHARLES MICHAEL LuPicA CHRISTOPHER BRODERICK SMITH GRAHAM B. COLE LEAH S. MARTIN NAOMI R. SOSNER MATTHEW WARREN DEAVERS CHIP MCCORKLE GREGORY SPRINGSTED DANIELLE ELIZABETH DEBOLD ERIC A. MINTZ MAx TIERMAN JOSHUA M. DRAPEKIN BENJAMIN E. NOrrERMAN PATRICK R. TOTARO NICOLE A. ESCOBAR GIL OFIR YAEL TZIPORI MEACAN L. FROEMMING JANE PARK PETER VAN VALKENBURGH JULIANJ. GINOS DANIEL WOLFF DAVID A. GIRoux KYUNGEUN K. WON vi SUMMARY OF CONTENTS LAW AND MECHANISM DESIGN: PROCEDURES TO INDUCE HONEST BARGAINING StevenJ Brams & Joshua R Mitts 729 AN APPEALING CHOICE: AN ANALYSIS OF AND A PROPOSAL FOR CERTIFICATES OF APPEALABILITY IN "PROCEDURAL" HABEAS APPEALS David Goodwin 791 THE LAW OF INTENDED CONSEQUENCES: DID THE AMERICANS WITH DISABILITIES ACT AMENDMENTs ACT MAKE IT EASIER FOR CANCER SURVIVORS TO PROVE DISABILITY STATUS? Barbara Hoffman 843 FACEBOOK USED TAKEDOWN AND IT WAS SUPER EFFECTIVE! FINDING A FRAMEWORK FOR PROTECTING USER RIGHTS OF EXPRESSION ON SOCIAL NETWORKING SrrES Kevin Park 891 Imaged with the Permission of N.Y.U. Annual Survey of American Law Viii Imaged with the Permission of N.Y.U. Annual Survey of American Law \\jciprod01\productn\N\NYS\68-4\NYS401.txt unknown Seq: 1 4-MAR-14 8:33 LAW AND MECHANISM DESIGN: PROCEDURES TO INDUCE HONEST BARGAINING STEVEN J. BRAMS* & JOSHUA R. MITTS† ABSTRACT A classic challenge in contract and property law is unstructured negotiation between two parties with asymmetric information (i.e., each party has different private information) under bilateral mo- nopoly (each party must negotiate with the other to try to reach an agreement), which often leads to prohibitively high transaction costs and, if the parties fail to agree, social costs as well. In these situations, the law should incorporate principles of mechanism de- sign, a methodology that employs structured procedures to give the parties incentives to reach agreement. In terms of contract theory, mechanisms constitute algorithmic altering rules that reduce if not eliminate inefficient transaction costs. We review two bargaining mechanisms that inherently elicit honesty by making it a dominant strategy and discuss two extensions for legal applications. In partic- ular, we show that algorithmic procedures would reduce transac- tion costs and lead to more efficient bargaining in pretrial settlement negotiations and blockholder disclosure under section 13(d) of the Securities Exchange Act of 1934. The former is a straightforward application of mechanism design to a negotiation situation wherein the social externalities of nonagreement justify inducing the honest disclosure of reservation prices, or “bottom lines.” The latter is an example of using mechanism design to facili- tate negotiated settlements in situations presently subject to a suboptimal mandatory rule. Introduction ................................................ 730 R I. Negotiation and the Mechanism Design Literature. 733 R A. Transaction Costs in Bargaining Under Bilateral Monopoly with Assymetric Information .......... 733 R B. Negotiation Mechanism as Procedural Altering Rules ............................................ 739 R * Professor of Politics, New York University. † Associate, Sullivan & Cromwell, LLP. The views in this article should not be attributed to Mr. Mitts’s employer. 729 \\jciprod01\productn\N\NYS\68-4\NYS401.txt unknown Seq: 2 4-MAR-14 8:33 730 NYU ANNUAL SURVEY OF AMERICAN LAW [Vol. 68:729 C. What is Mechanism Design? A Review of the Literature ....................................... 743 R II. Applying Mechanism Design to Contractual Negotiations ......................................... 748 R A. Truth-Telling and Collusion in Bargaining: The Chatterjee-Samuelson and Bonus Procedures .... 748 R B. The Two-Stage Procedure: Overview, Visualization, and Implementation ............... 753 R 1. Overview of the Mechanism ................. 753 R 2. Visualization ................................. 756 R 3. Implementation ............................. 757 R C. Extensions of the Procedures for Legal Applications ..................................... 761 R 1. A Budget-Balanced Bonus: Taxing Under the Bonus Procedure ............................ 761 R 2. Utilizing Truthful Information to Improve Regulatory Policy ............................ 763 R III. Applying Mechanism Design to Settlement Negotiations and Securities Regulation .............. 765 R A. Settlement Negotiations ......................... 766 R 1. An Overview of Mandatory Pretrial Settlement Negotiations ................................. 766 R 2. Applying the Bonus and Two-Stage Procedures to Settlement Negotiations ....... 770 R 3. Social Benefits of Honesty-Inducing Procedures for Settlement Negotiations ...... 771 R B. Securities Regulation: Reconsidering Mandatory Blockholder Disclosure .......................... 773 R 1. Overview, Private Ordering, and Efficient Trade ....................................... 773 R 2. Applying the Bonus and Two-Stage Procedures to Negotiating Delayed Blockholder Disclosure ...................... 783 R 3. Regulating Social and Macroeconomic Effects ....................................... 787 R Conclusion ................................................. 789 R INTRODUCTION Freedom of contract is a fundamental principle of the Ameri- can legal system. At its core, it reflects a free-market orientation that entrusts actors with the discretion to transact as they wish. We sug- gest, however, that a few structured restraints on freedom of contract could bring substantial improvements to legal fields as diverse as \\jciprod01\productn\N\NYS\68-4\NYS401.txt unknown Seq: 3 4-MAR-14 8:33 2013] LAW AND MECHANISM DESIGN 731 alternative dispute resolution and securities regulation. This is not such a radical idea: the law already curtails unstructured negotia- tion for the sake of other socially beneficial goals. A classic example from property law is the case of Boomer v. Atlantic Cement Co., which involved a nuisance claim by landowners against a neighboring factory for