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Steven Shavell, Alternative Dispute Resolution: An Economic Analysis, 24 J. Legal Stud. 1 (1995).

Abstract: When parties need to resolve disputes, they may often turn not only to trial before courts but also to alternative methods of dispute resolution (ADR), such as arbitration. This article examines why parties make use of ADR and what the social interest is in ADR. A basic distinction is drawn between ex ante ADR arrangements (made before disputes arise) and ex post ADR agreements (made after disputes arise). The private advantages of ex ante ADR agreements are identified. Because such agreements raise parties' well-being, the agreements should ordinarily be legally enforced. But there is no general call for ex ante ADR to be aided by the state. Ex post ADR agreements are somewhat different, in part because parties do not take into account how such agreements will affect their prior behavior. Hence, the agreements do not necessarily advance parties' welfare and, as with ex ante ADR, there is no general basis for public support of ex post ADR.