The optimal size of groups in a settlement negotiation

Last week the student-led Waikato Economics Discussion Group (EDG) discussed "Are large natural groupings (iwi) the best people to be negotiating treaty settlements?". It was an interesting discussion, which really boiled down to a debate about whether it was better to negotiate with a small number of large groups, or a larger number of small groups (and you can find some context that precipitated the choice of topic here). At the end of the session I pointed out that there is an existing framework that can be used to understand this decision, which comes from 1986 Nobel Prize winner James Buchanan.

In deciding the optimal number of people to be involved, there are two types of costs that need to be balanced:

1. Decision-making costs - the costs of coming to an agreement (usually associated with the time and effort required to agree on a decision), which increase when the number of people (or groups) involved in the decision-making increases
2. External costs - the costs borne by members of society who disagree with the decision (usually because they were not involved in the decision-making), which increase when the costs are borne by a larger number of people (that is, when fewer people, or groups, are involved in the decision-making)

So, if you think about the number of people (or groups) involved in negotiating a settlement, the decision-making costs increase with the number of groups, and the external costs decrease with the number of groups. This is illustrated in the diagram below, where the x-axis (Q) is the number of people (or groups) included in the settlement negotiations.

On the left of the diagram, there are a few large groups included in the negotiations (at the limit, there is just one representative of everyone). The decision-making costs are lowest, since agreement between the Crown and a single representative is relatively easy. However, the external costs are large, because many people may disagree with what the single representative has agreed on their behalf.

On the right of the diagram, there are many small groups included in the negotiations (at the limit, every person is individually included in the negotiations). The decision-making costs are highest, since agreement between the Crown and every person individually is going to take a lot of time and effort (and there may be 'holdout minorities' who hold out for a better deal). However, the external costs are minimised, because no individual will agree to the settlement if it makes them worse off.

The optimal number of groups to be included in the negotiation occurs where the two curves intersect (at Q*). At that point, the total of decision-making costs and external costs is minimised.

This only provides a framework for understanding how to decide how many groups should be included in the negotiations. If decision-making costs are high, then that would favour having fewer groups that are larger in size in the negotiations (because Q* will be further to the left). If external costs are high, then that would favour having many smaller groups in the negotiations (because Q* will be further to the right).

In the case of the Crown negotiating with iwi over Treaty of Waitangi settlements, it seems to me that the external costs are likely to be high. The decision-making costs may be high as well, but Maori culture is much more collective and inclusive than Western culture, and there are likely to be intrinsic costs faced by Maori who feel disenfranchised by being included within a larger grouping. I would suggest that this tends to favour negotiations with smaller groups, where necessary.