Axiomatic Formulation of the Optimal Transaction Cost Theory in the Legal Process through Cobb-Douglas Optimization

In a legal dispute, parties engage in a series of negotiations so as to arrive at a reasonable settlement. The parties need to present a fair and reasonable bargain in order to induce the WTA (willingness to accept) of the plaintiff and the WTP(willingness to pay) of the defendant. Cooperation can only be attained when the WTA of the plaintiff is less than or equal to the WTP of the defendant, thus WTA≤WTP. From an economic perspective, the legal process can be considered as a market place of buying and selling claims. High transaction costs decrease the reasonable bargain, thereby making cooperation more appealing to the defendant. On the other hand, low or zero transaction costs means the reasonable bargain is only dependent on the expected gain from winning at trial and the settlement benefit thereby making cooperation more appealing to the plaintiff. Hence, we need to find a way of adjusting the number of settlements with the number of trials in order to maximize the social utility value. This paper uses Cobb-Douglas optimization to formulate an optimal transaction cost algorithm considering the confinement of a generalized legal framework