Bargaining around cost–benefit standards

• Cost–benefit standards are susceptible to strategic bargaining.
• Injurers could profitably buy out victims even if they attach no value to victims' property.
• The buyout of one victim imposes a negative externality on the remaining victims.
• Injurers can exploit victims and reduce social welfare using a “divide-and-conquer” strategy.
• Buyouts could reduce social welfare even if victims possess the entire bargaining power.

Injurers often purchase the property of potential victims to avoid liability or to comply with regulations. This paper shows that injurers subject to cost–benefit standards could profit from buying out victims even if they attach no value to the victims' property. Because buyouts allow injurers to take fewer precautions, a buyout of one victim produces a negative externality for the remaining victims. Injurers can consequently exploit victims, and thereby reduce social welfare, by adopting a “divide-and-conquer” strategy or by negotiating with victims sequentially. Perhaps surprisingly, buyouts may reduce social welfare and victims' joint profits even if victims make simultaneous or sequential take-it-or-leave-it buyout demands to the injurer.