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September 1, 2012
Otto Toby Daviss believed that market exchange, and the institutions that foster market
exchange, were crucial to human development and flourishing. In two famous papers (Wu and Davis,
1999a and 1999b), Toby and his coauthor Wenbo Wu argued that economic freedom is
fundamental, and can precede political freedom on a growth path to development. But critics protested,
plausibly, that this aggregate result assumes too much about the justice of market exchanges between
particular individuals. If the disparity between market participants is too vast, if the access to the
benefits to markets are too restricted to those with market power, then the aggregate growth may
benefit the nation, but will exploit and damage those too weak to negotiate on fair terms. In this
paper, we take on the issue directly, investigating the moral obligations of individual participants in
market exchange. We are able to show that it is possible for market exchange to be just, even if it
may not be fair. Therefore, on both material consequentialist and moral justice grounds, market
freedoms can support the claims made by Davis and other advocates.
1 Introduction
Any plausible theory of just market exchange must balance two conflicting moral considerations:
euvoluntariness (true voluntariness) and Pareto efficiency. Voluntariness requires that neither party is
coerced into exchange by threat of violence or other form of direct harm. Euvoluntariness
imposes the additional requirement that neither party is coerced by the lack of a decent alternative
to a negotiated agreement. Pareto efficiency, on the other hand, requires that voluntary, mutually
beneficial exchanges should always be allowed, even if they are not euvoluntary.
The conflict between euvoluntariness and efficiency is illustrated by Michael Sandel, who
describes coercion by scarcity of alternatives.
The... objection [to the claim that an exchange is truly voluntary] is an argument
from coercion. It points to the injustice that can arise when people buy and sell things
under conditions of severe inequality or dire economic necessity. According to this
- Centro de Investigacin en Complejidad Social and Facultad de Gobierno, Universidad de Desarrollo.
Departments of Economics and Political Science, Duke University.
3
objection, market exchanges are not necessarily as voluntary as market enthusiasts
suggest. A peasant may agree to sell his kidney or cornea in order to feed his starving
family, but his agreement is not truly voluntary. He is coerced, in effect, by the
necessities of his situation (Sandel 1998).
Sandel notes that there are two conditions under which one party to an exchange might be
coerced by scarcity of alternatives: severe inequality or dire necessity. Severe inequality means
that the disparity in alternatives to the exchange is too large to be equitable. Dire necessity means
that for one party the alternative to exchange is disastrous. If at least one of these two conditions
is met the exchange is not euvoluntary.
However, it is not obvious that non-euvoluntary exchanges are morally objectionable, and even
less obvious that they should be prohibited. In Sandels example, the peasant would likely beg for a
chance to exchange, arguing that the loss of one kidney is better than having his family starve.
When viewed this way, denying him the right to sell his kidney appears to be a form of injustice.
The question naturally arises: Are non-euvoluntary market exchanges ever morally permissible? If
so, does justice impose any limits on the terms of exchange?
1
A sketch of an answer can be traced back to John Lockes essay Venditio, where he poses
the following moral dilemma:
A ship at sea that has an anchor to spare meets another which has lost all her
anchors. What here shall be the just price that she shall sell her anchor to the
distressed ship? To this I answer the same price that she would sell the same anchor to a ship that
was not in that distress. For that still is the market rate for which one would part with anything to
anybody who was not in distress and absolute want of it. And in this case the master of the
vessel must make his estimate by the length of his voyage, the season and seas he sails
in, and so what risk he shall run himself by parting with his [extra] anchor, which all
put together he would not part with it at any rate, but if he would, he must then take
no more for it from a ship in distress than he would from any other. (Locke,
1661/2005, Venditio, pp. 4456; emphasis added).
In a sense, Locke maintains that the safe ship must devise a fictitious negotiation in which the
distressed ship is not in distress, and behave in the actual negotiation as he would behave in the
fictitious one.
Inspired by all these ideas, we propose an analytical theory of just market exchange that guides
reasoned moral action in balancing euvoluntariness and efficiency. Our method is to postulate a
set of plausible moral axioms, and then use deductive logic to infer a series of moral imperatives
1
For our purposes, the validity of Sandels example depends on whether a kidney qualifies as transferable property or not
(Sandel himself would raise this objection). As this matter is the subject of another debate, we will refrain from taking a position.
In what follows, we will restrict the analysis to the exchange of conventional market goods and services.
4
with respect to two issues: the circumstances under which exchange is morally optional or
obligatory, and the just allocation of the gains from exchange.
The theory is operationalized through a fictitious negotiation model. Briefly, the fictitious
negotiation model is as follows:
1. Neither party is morally obliged to suffer harm by an act of market exchange.
2. The negotiation will be fair and exchange will be euvoluntary if and only if the disparity
between the parties outside options
2
does not exceed a certain threshold. The magnitude of
the disparity threshold depends on the abjectness of the weaker party. The direr the weaker
partys outside option, the lower the disparity threshold.
3. If the negotiation is fair, all non-supererogatory outcomes are just. A non-supererogatory
outcome is either a mutually beneficial agreement or the disagreement outcome, in which
the parties get their respective outside options.
4. If the negotiation is unfair, the stronger party must devise a fictitious negotiation, in which
the weaker party has an improved outside option. The outside option must be improved
until one of two things happens:
(a) The disparity in outside options is reduced until it is no longer unfair. This does not
require that all the disparity disappears; only that it equals the disparity threshold.
(b) The surplus of the fictitious negotiation is reduced to zero. This can happen because the
surplus of any negotiation decreases as the parties outside options improve.
We term condition (b) the non-worseness
3
clause of the fictitious negotiation.
5. The just agreements of the actual negotiation correspond to the non-supererogatory
outcomes of the fictitious negotiation that are implementable in practice.
The fictitious negotiation model is parametric. The free parameter is the observers revulsion
toward the imbalance in bargaining power, which is captured by the disparity threshold. Rather
than being a constant, the disparity threshold is a decreasing function of the direness of the weaker
partys outside option, but the particular shape of the threshold function varies from observer to
observer. Clusters of similar disparity threshold functions constitute a culture. A threshold
function that captures the essential features of a culture constitutes an ideology.
2
In the jargon of game theory, the parties outside options are their best alternatives to a negotiated agreement.
3
Non-worseness is a potential constraint on moral action, on consequentialist grounds. Suppose that, in order for the
stronger party to act morally, the weaker party must actually be harmed in some material sense. Non-worseness is described by
Zwolinski (2008, 2009) interpreting Wertheimer (1996), this way: In cases where A has a right not to transact with B, and where
transacting with B is not worse for B than not transacting with B at all, then it cannot be seriously wrong for A to engage in this
transaction, even if its terms are judged to be unfair by some external standard. (p. 357).
5
Several moral imperatives follow logically from the fictitious negotiation model. The most
important are:
1. If the negotiation is unfair but has a positive surplus, the stronger party is morally obliged
to exchange with the weaker party. He cannot refuse to exchange by invoking his property
rights, or by claiming that the exchange would not be euvoluntary.
2. Moreover, the stronger party must negotiate as if the weaker party had a better outside
option.
(a) This fictitious outside option should eliminate all the unfair disparity, provided this does
not rule out the possibility of a mutually beneficial exchange.
(b) Otherwise, the stronger party must give the entire surplus to the weaker party, and
content himself with a payoff equal to his outside option.
These logical implications of the model are imperatives because they will necessarily trigger
when the weaker partys outside option is sufficiently dire. The particular disparity threshold just
specifies the meaning of sufficiently dire. For some observers, even small disparities are sufficient
to trigger the obligation to give away the entire surplus. For other observers, who find property
rights and ownership paramount, the obligation may only trigger at very large disparities. But the
obligation to give away the surplus is always triggered, at the limit of infinite direness, even on the
eye of the least disparity-averse beholder.
The theory of just exchange is a coherent alternative to radical egalitarianism and radical
libertarianism. When they are carried to their logical conclusions, both moral philosophies produce
untenable moral judgments. This indicates that these philosophies are founded on flawed sets of
premises. In contrast to the radical moral philosophies, our theory of just exchange produces
perfectly intuitive moral judgments. Importantly, these judgments are logical consequences of the
premises of the theory. There is no need to patch the theory with a long list of exceptions. Below
we provide two brief examples (the detailed workings of the fictitious negotiations will be
presented in the following sections).
Radical egalitarians consider that voluntary exchange is unjust if the resulting allocation is
unequal, despite being beneficial to both parties. For example, radical egalitarians firmly oppose
sweatshops, even if the workers themselves prefer the low-paid factory jobs to starvation in the
fields.
4
In contrast, our theory entails that it is unjust to let the workers starve. Moreover, the
factory owner is obliged to hire them and pay substantially more than they would earn in the field,
but he is not obliged to incur an economic loss (i.e., he must recover at least his opportunity cost
of capital).
4
See, for example, Sample 2003, and SASL 2001.
6
Radical libertarians condone exchanges that violate even the most basic notions of human
dignity and mutual obligation. For example, a man lost in the desert is on the verge of dying of
thirst. Out of nowhere appears another man carrying plenty of water. From the point of view of a
radical, logically consistent libertarian, the passerby has the right to sell his water at any price he
chooses, even if that price is exorbitant and patently abusive. And what is more absurd, the
passerby is entitled to refuse the sale and let the lost man die of thirst. Our theory entails it is
unjust to deny water to a thirsty man. The passerby is obliged to sell his water, but he is not
obliged to give it away. He must offer the lowest price that covers the full cost of the water,
including the purchase price, transport costs, and opportunity costs of possibly needing the water
himself.
The paper is organized in six sections. In Section 2 we define the notion of euvoluntary
exchange. In Section 3 we present an analytical negotiation model and formalize the notions of
fairness and euvoluntariness. In Section 4 we develop the fictitious negotiation model and our
analytical theory of just market exchange, which makes a distinction between equitable and just
negotiated agreements. In Section 5 we apply the fictitious negotiation model to four hypothetical
examples, each an abstract version of a real life moral dilemma. The examples are: Lockes anchor
problem, competitive market exchange, price-gouging, and sharecropping contracts. In Section 6
we offer some conclusions. Importantly, we argue that all reasonable moral theories must be
parametrical, rather than strictly deductive ( la Kant) or sentimentalist ( la Hume). Our analytic
theory of just market exchange is an example of a parametric theory, because its axioms are
modulated by a free parameter: the disparity threshold function.
Before we proceed, a clarification must be made. In this paper, we do not advance a
comprehensive theory of justice, or even a theory of just exchange. Our theory is only concerned
with market exchange. Any other form of exchange is outside the theorys domain of application.
Market exchange takes place within a particular structure of social norms and legal constrains.
Practices of negotiation and bargaining that are perfectly acceptable in market exchange might be
considered distasteful, offensive, or plainly immoral in other contexts, such as romance, the family,
military service, politics, the school, sports, or religious worship. Furthermore, the law or social
custom may prohibit the commerce of certain goods (e.g., recreational drugs). But even if the
commerce of a good is socially accepted and legal, the good may be degraded or corrupted by
market exchange; sexual intercourse being a favorite example of this phenomenon (Sandel 1998).
This means that some goods are inherently non-marketable (e.g., friendship).
The fictitious negotiation model applies to the exchange of marketable goods, provided the
exchange is socially accepted and legal. In many cases, there will be little dissent in this regard. For
example, most people would agree that trade in food, clothing, housing, and labor are legitimate
businesses, and that these particular goods are not degraded or corrupted by market exchange. At
other times, dissent will be profound, as in the cases of prostitution and organ trade. For this
reason, we remain agnostic, and leave to readers the task of agreeing on the boundaries of markets.
7
2 Euvoluntary exchange
For a market exchange to be considered euvoluntary (truly voluntary) six conditions must be met
(Munger, 2011):
1. The parties own the objects being exchanged, according to the conventional interpretation
of ownership.
2. The parties have the capacity to transfer the ownership of these objects.
3. There is no fraud in the exchange, and no psychological compulsions such as addiction or
neuropathy.
4. The exchange does not produce large-scale uncompensated non-pecuniary externalities, and
does not impose costs on third parties without their express euvoluntary consent.
5. Neither party is coerced in the sense of being forced to exchange by threat of violence or
other form of direct harm.
6. Neither party is coerced in the alternative sense of being harmed by the dire consequences
of failing to exchange.
Conditions 16 are standard requirements for a valid contract in the common law. Conditions 5
and 6 could be summarized as no duress. An exchange will be voluntary if and only if conditions
15 are satisfied, but the exchange will not be euvoluntary unless condition 6 is satisfied as well.
As stated by condition 5, an exchange is not voluntary if a party exercises its power to force an
agreement that benefits him. Here, power is understood in its colloquial sense, as the ability to
impose ones will on others through the threat of violence or other form of direct harm.
In negotiations, power has a different meaning. Bargaining power is the ability to cause harm
indirectly by refusing to exchange. Condition 6 states that euvoluntariness requires that no party
has excessive bargaining power over the other. Note that condition 6 says nothing about the
exercise of bargaining power during the negotiation, only that the parties are close in power. The
balance in bargaining power makes a negotiation fair, in the similar sense that weight classes make
boxing matches fair. The boxers need not weigh the same, but fairness requires that the disparity
in weight must be within a reasonable range.
For example, most of us have a sense that monopoly is not only economically inefficient, but
fundamentally unfair. It is true that the monopolist does not hold a gun to the consumers head
and shouts buy! But if the product is desperately needed, a consumers decision to buy cannot
be said to be truly voluntary. Put another way, the sale is essentially an armed robbery.
David Hume gives another example of coercion by scarcity of alternatives:
8
A man, dangerously wounded, who promises a competent sum to a surgeon to
cure him, woud certainly be bound to performance; tho the case be not so much
different from that of one, who promises a sum to a robber. (Hume, 2000, Book III,
Pt. II, Page 11)
The surgeon has a tremendous bargaining power because the injured man is about to die and does
not have the time to call another doctor. Humes view on this case coincides with that of most
people: the exercise of bargaining power by the surgeon is a form of extortion.
3 A two-parties negotiation model
3.1 Definitions
Define a two-party negotiation as a three-tuple
2 1
, , d d v P = , where 0 > v is the total value to be
divided between the parties, and
1
d and
2
d are the parties outside options. The (potential)
surplus of the negotiation is thus
.
2 1
d d v = (1)
We will assume that the surplus is nonnegative, so
2 1
d d v + > . Otherwise, any exchange would
necessarily harm one of the parties. A negotiation with a positive surplus is profitable. A
negotiation with zero surplus is unprofitable.
We will also assume that the negotiation satisfies conditions 15 from the previous section.
These were, briefly, that ownership is exclusive and transferrable, there is no fraud or
psychological compulsion, there are no uncompensated non-pecuniary externalities, and no party
can force the other to accept a particular allocation.
Let
1
x and
2
x be the payoffs to party 1 and party 2, respectively. A negotiation outcome is
an allocation X x x e ) , (
2 1
, where
{ }
{ }. : ) , (
), , (
,
2 1 2 1
2 1
v x x x x A
d d d
d A X
= + =
=
=
(2)
Allocation d is the disagreement outcome, in which both parties obtain their outside options.
The allocations in set A are called (potential) agreements. The set of agreements can also be
written as follows,
{ }, : ) , (
2 1 2 1 2 1
d d x x x x A + + = + = (3)
since .
2 1
d d v =
9
As an example, consider the following negotiation. Ada has carved a sculpture which she
values at $1,000. The rest of her wealth amounts to $1,000,000. Bob, a collector, is interested in
the sculpture, which he values at $1,200. Before the negotiation, his wealth amounts to $1,500,000.
The surplus equals the difference in valuations; that is, $200. Formally,
. 200 $ 000 , 1 $ 200 , 1 $
, 000 , 500 , 1 $
000 , 001 , 1 $ 000 , 000 , 1 $ 000 , 1 $
Bob
Ada
= =
=
= + =
d
, d
(4)
If Ada and Bob reach an agreement, then
, , , $ p x
, , , $ p x
000 500 1 200 , 1 $
000 000 1
Bob
Ada
+ =
+ =
(5)
where p is the price agreed by the parties. Thus, the disagreement outcome, the set of
agreements, and the set of all possible outcomes are
{ }
{ } { }. ) 000 , 500 , 1 $ , 000 , 001 , 1 ($ 200 $ : ) , (
, 200 , 501 , 2 $ : ) , (
), 000 , 500 , 1 $ , 000 , 001 , 1 ($ ) , (
Bob Ada Bob Ada
Bob Ada Bob Ada
Bob Ada
= + =
= + =
=
x x x x X
x x x x A
d d
(6)
An agreement is mutually beneficial (i.e., Pareto-improving or neutral) if and only if
1 1
d x >
and
2 2
d x > . This condition is strong if both inequalities are strict, and weak if at least one of
the constraints is met with equality (i.e., that party is not strictly benefitted, but is indifferent
between exchanging and not exchanging). The set of mutually beneficial agreements is thus
}. , , : ) , {(
2 2 1 1 2 1 2 1 2 1
d x d x d d x x x x M > > + + = + = (7)
In what follows, we will assume that all mutually beneficial agreements are achievable through
negotiation, although this may not always be the case in reality. It may be that a potential surplus
exists, but that it cannot be divided between the parties; for instance, if it happens that one of the
parties lacks sufficient liquidity and cannot borrow.
For example, Andrew is broke, homeless, and starving. Beatrice is a prosperous baker. He
enters Beatrices bakery and begs her for bread, which would save him from starvation. There is a
very large surplus at stake, since the value of a human life is much higher than the cost of
producing a loaf of bread. However, there are only two possible negotiation outcomes, neither of
which is mutually beneficial: Beatrice ignores Andrew and he starves, or she gives him a loaf of
bread for free (losing the opportunity cost) and he survives. Since a mutually beneficial agreement
is not achievable, this negotiation is not a true case of standard market exchange. Thus, our model
is silent about its moral content.
10
In principle, any non-mutually beneficial agreement could be achieved with the voluntary
consent of both parties. In our model, an agreement in which one party sacrifices itself to benefit
the other is considered supererogatory. There are two sets of supererogatory agreements,
depending on which party makes the sacrifice:
{ } . 2 , 1 for , , : ) , (
2 1 2 1
= < = + = i d x v x x x x S
i i i
(8)
Note that
2 1
S M S X = , where
1
S , M , and
2
S are disjoint sets.
The set of non-supererogatory negotiation outcomes contains all mutually beneficial
agreements and also the disagreement outcome:
{ }. ) , (
2 1 2 1
d d M S S X NS = = (9)
The sets M and { } ) , (
2 1
d d need not be disjoint. If M d d e ) , (
2 1
, then the negotiation has zero
surplus, and vice versa.
3.2 Euvoluntary exchange and the disparity threshold
Without loss of generality, let us assume that
2 1
d d < . The fact that the outside option for party 1
is worse means that party 1 is the weaker party to the negotiation and that party 2 is the stronger
party. Euvoluntariness does not require that there be zero disparity in outside options, but only
that the disparity not be too large. The specific meaning of too large depends on the
observers revulsion toward the imbalance in bargaining power.
An observed disparity in outside options is fair if and only if it does not exceed the disparity
threshold function ; that is, if and only if d d s
1 2
, where 0 > . The smaller is , the less
likely that any given exchange will be euvoluntary. To quantify the magnitude of the unfairness, we
define the (degree of) unfair disparity:
( ) { } 0 , max
1 2
d d = (10)
We distinguish between a negotiation, which is the process of reaching an agreement or a
disagreement, and an exchange, which is the act of consummating an agreement. If there is no
unfair disparity (i.e., if 0 = ), the negotiation is fair. Any exchange between the parties will be
considered euvoluntary. If there is an unfair disparity, the negotiation is unfair. Any exchange
between the parties will be considered non-euvoluntary.
We will assume that the disparity threshold is a non-decreasing function of the weaker partys
outside option:
, : ) (
1
D d 9 (11)
11
where
0 >
9 _ D . Intuitively, the disparity threshold function should increase with the weaker
partys outside option (in absolute terms, not in relation to the other partys outside option). The
reason is that an imbalance of bargaining power strikes most people as more unfair when the
weaker party is desperate.
Figure 1 shows what may be considered a reasonable disparity threshold function. As
1
d
grows smaller, the value of ) (
1
d asymptotically approaches zero. Consequently, all negotiations
will violate the unfair disparity threshold, because even the smallest differences between
1
d and
2
d
will be larger than ) (
1
d . But for larger values of
1
d , the value of ) (
1
d might rise very quickly,
implying that even exchanges with significant disparity in outside options will be euvoluntary.
Radical egalitarianism and radical libertarianism can be modeled as particular cases of the
threshold function. On the side of radical egalitarians, Olsaretti (2003)
5
would argue that ) (
1
d
should be close to zero for all values of
1
d . This implies that an exchange can only be euvoluntary
if the difference in outside options is negligible. On the side of radical libertarians, Robert Nozick
(1974) (worried about preventing capitalist acts between consenting adults) would advocate for
an infinite disparity threshold, regardless how low the value of
1
d . This is to say that voluntary
and euvoluntary exchanges are two names for the same thing. In Nozicks worldview, there is no
such thing as coercion by scarcity of alternatives.
To summarize, in this section we posited a specific condition under which negotiations are fair
and exchanges are euvoluntary:
{ } . 0 0 ), ( ) ( max disparity unfair
1 1 2
= = d d d (12)
5
See also Colburn 2008, and Gaus 2007.
Figure 1: A reasonable disparity threshold function
(d1)
d1
12
This condition would be true if the parties have similar bargaining power (i.e.,
1
d and
2
d are close
in magnitude), but the condition could also be true if the disparity threshold is so large that we do
not care that the weaker party lacks a decent alternative to a negotiated agreement. We allow the
disparity threshold to increase with the value of the weaker partys outside option, which captures
the intuition that disparity in outside options is more unfair when the weaker party is desperate.
4 The fictitious negotiation model of just market exchange
Formally, a fictitious negotiation is a three-tuple
2 1
, , d d q P ' = ' . Its only difference with the
actual negotiation P is that P' assigns an improved fictitious outside option
1
d ' to the weaker
party. The fictitious outside option is defined as follows:
{ }, , min
1 1
+ = ' d d (13)
where is the unfair disparity of the actual negotiation, and is its surplus.
Properties of the fictitious negotiation
1. If the actual negotiation is fair, then the actual and the fictitious negotiations are identical.
. 0 P P ' = = (14)
2. If the actual negotiation is unfair and has zero surplus, then the actual and the fictitious
negotiations are identical. Both have a unique mutually beneficial agreement, which
coincides with the actual disagreement outcome.
{ }. 0 0 d M M P P = ' = . ' = = . > (15)
3. If the actual negotiation is unfair but potentially profitable, and the unfair disparity does not
exceed the surplus, then the fictitious negotiation completely eliminates the unfair disparity
and is potentially profitable. The fictitious negotiation has infinitely many mutually
beneficial agreements, which constitute a proper subset of the actual mutually beneficial
agreements. The actual disagreement outcome is not a feasible outcome of the fictitious
negotiation.
. c 0 0 0 X d M M M ' e . c ' . = . > ' . = ' s < (16)
4. If the actual negotiation is unfair but potentially profitable, and the unfair disparity exceeds
the surplus, then the fictitious negotiation reduces the unfair disparity but does not
eliminate it. The fictitious negotiation is unfair, but less unfair than the actual negotiation.
The surplus of the fictitious negotiation is reduced to zero. The fictitious negotiation has a
13
unique mutually beneficial agreement, which corresponds to the fictitious disagreement
outcome. This outcome assigns the entire surplus to the weaker party. The actual
disagreement outcome is not a feasible outcome of the fictitious negotiation.
{ } . ) , ( 0 0 0
2 1
X d d d d d M ' e . + = ' . ' = ' . = ' . < ' < < < (17)
Proofs to these properties are provided in Appendix A.1
A negotiation outcome can be either equitable or inequitable. Three requirements must be
met for an outcome to be equitable. First, it must be feasible (i.e., it bust belong to X ) Second,
the outcome must be a non-supererogatory outcome of
the fictitious negotiation. Third, the
fictitious negotiation must completely eliminate the unfair disparity.
In formal terms, the set of equitable outcomes is
> ' C
= ' '
=
. 0 if
, 0 if S N X
E (18)
The inequitable outcomes, on the other hand, correspond to the non-supererogatory outcomes
that are not equitable:
E NS IE = (19)
The sets of equitable and inequitable outcomes are decomposed in Table 1.
Properties of the equitable outcomes
1. If the actual negotiation is fair, then all non-supererogatory outcomes are equitable
(including the disagreement outcome).
{ }. 0 d M NS E = = = (20)
Table 1: Decomposition of the sets of equitable, inequitable, just, and unjust outcomes
Case
Equitable
outcomes
Inequitable
outcomes
Just outcomes Unjust outcomes
14
2. If the actual negotiation is unfair and has zero surplus, then no outcome is equitable.
. 0 0 C = = . > E (21)
3. If the actual negotiation is unfair but potentially profitable, and the unfair disparity does not
exceed the surplus, then the negotiation has infinitely many equitable outcomes. These
correspond to the fictitious mutually beneficial agreements. These agreements constitute a
proper subset of actual mutually beneficial agreements. The actual disagreement outcome is
inequitable.
{ } . c 0 UE d M M E E e . c ' = . = s < (22)
4. If the actual negotiation is unfair but potentially profitable, and the unfair disparity exceeds
the surplus, then no outcome is equitable.
. 0 C = < < E (23)
Proofs to these properties are provided in Appendix A.2.
It may seem natural that a negotiation outcome must be equitable to be considered just. But
this requirement is too stringent to be reasonable, as it would prohibit inequitable mutually
beneficial agreements when no equitable agreement is available (property 4). Worse yet, the
prohibition will take effect precisely when the weaker party more desperately needs to exchange.
This is because the disparity in outside options is more unfair when the weaker partys outside
option is more disastrous.
We propose a less stringent definition of justice that avoids this problem. We affirm that the
just outcomes correspond to the implementable non-supererogatory outcomes of
the fictitious
negotiation. These are the outcomes that two self-interested and rational parties could reach
euvoluntarily if the fictitious negotiation actually took place.
In formal terms, the set of just outcomes is
S N X J ' = (24)
The unjust outcomes, on the other hand, correspond to the non-supererogatory outcomes that
are not just:
. J NS UJ = (25)
The sets of just and unjust outcomes are decomposed in Table 1.
15
Properties of the just outcomes
1. If the actual negotiation is fair, then all non-supererogatory outcomes are both equitable
and just (including the disagreement outcome). Therefore, exchange is morally optional.
{ }. 0 d M NS E J = = = = (26)
2. If the actual negotiation is unfair and has zero surplus, the disagreement outcome is just,
although it is not equitable. This outcome coincides with the unique mutually beneficial
agreement of the actual negotiation, which is also just. Therefore, exchange is morally
optional.
{ } . 0 0 UF d M d J e . = = = . > (27)
3. If the actual negotiation is unfair but potentially profitable, and the unfair disparity does not
exceed the surplus, then the negotiation has infinitely many just outcomes. Just and
equitable outcomes are the same, and correspond to the fictitious mutually beneficial
agreements, which constitute a proper subset of actual mutually beneficial agreements. The
actual disagreement outcome is unjust. Therefore, the stronger party is morally obliged to
exchange with the weaker party.
. c 0 UJ d M M E J J e . c ' = = . = s < (28)
4. If the actual negotiation is unfair but potentially profitable, and the unfair disparity exceeds
the surplus, then the fictitious disagreement outcome is the only just outcome, although it is
inequitable. The just outcome assigns the entire surplus of the actual negotiation to the
weaker party, so the stronger party is left indifferent between exchanging and not
exchanging. The actual disagreement outcome is unjust. Therefore, the stronger party is
morally obliged to exchange with the weaker party.
{ } . ) , ( 0
2 1
UJ d d d d UE d d M J e . + = ' . e ' . ' = ' = < < (29)
Proofs to these properties are provided in Appendix A.3.
As a corollary to these properties, we have:
1. All negotiations have at least one just outcome.
2. All equitable outcomes are just.
3. If a negotiation has at least one equitable outcome, then the just and equitable outcomes
coincide.
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4. If a negotiation does not have an equitable outcome, then it has a unique just outcome,
which assigns the entire surplus to the weaker party.
5. If the negotiation is unfair but potentially profitable, then a disagreement is unjust.
5 Examples
5.1 A ship without an anchor
A ship at sea that has an anchor to spare meets another which has lost all her
anchors. What here shall be the just price that she shall sell her anchor to the
distressed ship? (Locke, 1661/2005, Venditio, p.p. 4456)
Denote by 0
1
> u the use value of a first anchor, and by 0
2
> u the use value of a spare. Since
the lack of an anchor is dangerous, the use value of a main anchor is quite high, approaching the
value of the ship plus the value of its cargo and a value for the lives of the passengers and crews.
A spare anchor is inessential, but provides valuable insurance against the accidental loss of the first
anchor. Hence,
2 1
u u > . At port, anchors are bought and sold at 0
mkt
> p .
The ships outside options correspond to the status quo:
, 2
, 0
mkt 2 1 2
1
p u u d
d
+ + =
=
(30)
where ship 1 is the distressed ship, and ship 2 is the rescuer. The outside option of the rescuer ship
includes the market price of her anchors, because at the end of her voyage the ship will sell them
at the port. Or, what amounts to the same thing, the ship could sell the anchors to herself at the
market price to use again on a future voyage.
The distressed ship values the anchor at
mkt 1
p u + , while the rescuer ship values it in
mkt 2
p u + . The surplus of the negotiation is equal to the difference in valuations:
. 0
2 1
> = u u (31)
Following Locke, we will assume that the prospect of a shipwreck is so dire that the unfair
disparity is greater than zero:
. 0 ) 0 ( 2
mkt 2 1
> + + = p u u (32)
Locke argues in his Venditio that the only just price for the spare anchor is its market price plus
its use value for the rescuer ship. At that price, the rescuer is indifferent between selling and not
selling. Locke claims that the rescuer is not obliged to perform a supererogatory act and simply
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give away the anchor. But at the same time he claims that the rescuer ship may not profit from the
distress of the other ship, recognizing that profit in this case means taking a price above the
price required to make the rescuer ship indifferent between selling and not selling.
Under reasonable parameterizations, a fictitious negotiation would lead to the same conclusion
reached by Locke. Recall that the non-worseness clause is activated if the unfair disparity is larger
than the surplus. In the case at hand, this condition reduces to
( ) . 0 ) 0 ( 2
mkt 2
> + = p u (33)
Most people would agree that the value of human life is so high that the disparity threshold in this
case must be extremely low, probably close to zero. This implies that the previous condition is
met. As Locke intuited, the rescuer ship has a duty to hand over the entire surplus to the distressed
ship, but not a penny more. Moreover, and contrary to Lockes intuition
6
, the rescuer boat is
morally obliged to exchange with the distressed ship. The rescuer cannot argue that property rights
allow her to refuse the sale.
5.2 Competitive market exchange
Is it just to charge high prices for an essential commodity? We argue that the answer is yes,
provided the market for the commodity is competitive. All competitive market exchanges are just,
because they do not generate a surplus. We show this below.
A producer and a consumer are bargaining over the price of a certain commodity, which is also
traded in a competitive market. Let 0 > c be the cost of producing the commodity, and let u be its
use value for the consumer. The parties alternative to the exchange is trading with someone else in
the market. Denote by
mkt
p the market price of the good, and assume that u p c < <
mkt
. Let
prod
w be the wealth of the producer, and let
cons
w be the wealth of the consumer. It follows that
the outside options are
.
,
cons mkt cons
prod mkt prod
w p u d
w c p d
+ =
+ =
(34)
Also, if an agreement is reached, then
,
,
cons cons
prod prod
w p u x
w c p x
+ =
+ =
(35)
6
As Locke put it: And in this case the master of the vessel must make his estimate by the length of his voyage, the season
and seas he sails in, and so what risk he shall run himself by parting with his [extra] anchor, which all put together he would not part with
it at any rate, but if he would, he must then take no more for it from a ship in distress than he would from any other. In other
words, there is no obligation to sell the extra anchor, though the value of the first anchor to the distress ship is clearly higher than
the second anchor to the other ship.
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where p is the price agreed between the parties. Therefore, the surplus created by the exchange is
given by
( ) ( ) ( ) ( )
, 0