Pareto Optimality in Negotiation: A Classroom Exercise for Achieving Active Learning

An active learning exercise in which students negotiate an agreement in a real estate transaction is described. There are three issues in dispute: sales price, move-in date, and which of the seller's belongings they will leave for the new owners. Because the issues vary in importance to the two negotiators, agreements in which students “split the difference” on all three issues are not efficient. This exercise facilitates discussion of Pareto efficiency in business courses at introductory or intermediate levels. It is also useful as an introduction to bargaining, integrative agreements in negotiation, information, Nash equilibrium, and positive sum games.