Resolving a Conflict Situation with a Reference Outcome: An Axiomatic Model

We formulate an axiomatic model of conflict situations in which there exist two prominent outcomes. One is the traditional conflict outcome, the other is the reference outcome. The latter is an outcome with the following properties: (1) It is Pareto-superior to the conflict outcome, (2) It is not Pareto optimal, (3) All the bargainers agree that the conflict's solution should be Pareto superior to it. We present a solution function for this model. It satisfies uniquely several desirable requirements. The model is an extension of Nash's Bargaining Problem paradigm, and the particular solution function we propose is a variation of the Kalai-Smorodinsky solution.