According to the economic theory of bargaining, each party to a voluntary agreement must receive at least the amount that he can get on his own (“threat value”), plus a share of the surplus from the bargain. Courts frequently monitor bargains between citizens and the state. To protect citizens, the courts should focus on the fairness and efficiency of the threat points of the citizens. Unfortunately, courts often focus on the terms of the agreement, not the threat points. The wrong focus leads courts to impose rules that block bargains that would benefit both parties. I analyze an example where the U.S. Supreme Court precluded the possibility of a beneficial bargain between a private property owner and a land-use planning authority. The private property owner wanted a permit to develop land. The state required the private owner to offset the harm by giving something to the public in exchange for the development permit. By focusing on the outcome and not the threat points, the Supreme Court misconceived the problem. Specifically, the Supreme Court misconceived the requirement of a “causal nexus” between the harm that private development will cause to the public and the bargain with the state to offset this harm.
Available at: http://works.bepress.com/robert_cooter/148/