Abstract
Arbitration is increasingly employed to resolve disputes. Two arbitration mechanisms, conventional arbitration (CA) and final-offer arbitration (FOA) are commonly utilized, but previous theoretical and empirical research has found that they are unsatisfactory. Several alternative mechanisms have been proposed, but ultimately laboratory research has found that they do not offer an improvement. An exception is amended final-offer arbitration (AFOA), which not only has desirable theoretical properties but also has been demonstrated to outperform FOA in the laboratory. This study provides a direct laboratory comparison of AFOA with CA. Also, by utilizing an environment with an uncertain payoff to one of the parties, this study tests the robustness of AFOA’s performance relative to FOA. The results indicate that AFOA does outperform FOA, but that AFOA is only weakly better than CA.
This is a preview of subscription content, access via your institution.
References
Ashenfelter, O., Currie, J., Farber, H. S., & Spiegel, M. (1992). An experimental comparison of dispute rates in alternative arbitration systems. Econometrica, 60, 1407–1433.
Babcock, L., & Loewenstein, G. (1997). Explaining bargaining impasse: the role of self-serving biases. Journal of Economic Perspectives, 11(Winter), 109–126.
Babcock, L., Loewenstein, G., & Wang, X. (1995). The relationship between uncertainty, the contract zone and efficiency in a bargaining experiment. Journal of Economic Behavior and Organization, 27, 475–485.
Bernstein, L. (1993). Understanding the limits of court-connected ADR: a critique of federal court-annexed arbitration programs. University of Pennsylvania Law Review, 141, 2169–2259.
Bolton, G. E., & Katok, E. (1998). Reinterpreting arbitration’s narcotic effect: An experimental study of learning in repeated bargaining. Games and Economic Behavior, 25, 1–33.
Brams, S. J., & Merrill, S. III. (1983). Equilibrium strategies for final-offer arbitration: There is no median convergence. Management Science, 29, 927–941.
Brams, S. J., & Merrill, S. III. (1986). Binding versus final-offer arbitration: A combination is best. Management Science, 32, 1346–1355.
Deck, C., & Farmer, A. (2005). Bargaining with asymmetric uncertainty: Arbitration mechanisms compared. Working paper, University of Arkansas.
Deck, C., & Farmer, A. (2007). Bargaining over an uncertain value: Arbitration mechanisms compared. Journal of Law, Economics and Organization, 23, forthcoming.
Deck, C., Farmer, A., & Zeng, D.-Z. (2005). Amended final-offer arbitration outperforms final-offer arbitration. Working paper, University of Arkansas.
Dickinson, D. L. (2004). A comparison of conventional, final-offer, and ‘Combined’ arbitration for dispute resolution. Industrial and Labor Relations Review, 57, 288–301.
Dickinson, D. L. (2005a). Bargaining outcomes with double-offer arbitration. Experimental Economics, 8, 145–166.
Dickinson, D. L. (2005b). The effects of beliefs versus risk preferences on bargaining outcomes, working paper.
Farber, H. S. (1980). An analysis of final-offer arbitration. Journal of Conflict Resolution, 24, 683–705.
Farber, H. S., & Bazerman, M.H. (1989). Divergent expectations as a cause of disagreement in bargaining: evidence from a comparison of arbitration schemes. Quarterly Journal of Economics, 104, 99–120.
Farmer, A., & Pecorino, P. (1996). Issues of informational asymmetry in legal bargaining. In Dispute Resolution: Bridging the Settlement Gap, JAI Press, Inc.
Farmer, A., Pecorino. P., & Stango V. (2004). The causes of bargaining failure: evidence from major league baseball. Journal of Law and Economics, 47, 543–568.
Feuille, P. (1975). Final-offer arbitration and the chilling effect. Industrial Relations, 14, 302–310.
Fuller, James P. (1993) U.S. Tax review. Tax Notes International, 7, 1041–1042.
Hollander, M., & Wolfe, D. (1999). Nonparametric statistical methods, 2nd ed. New York, NY: John Wiley and Sons, Inc.
Kilgour, D. M. (1994). Game-theoretic properties of final-offer arbitration. Group Decision and Negotiation, 3, 285–301.
Long, G., & Feuille, P. (1974). Final-offer arbitration: sudden death in eugene. Industrial and Labor Relations Review, 27, 186–203.
Longford, N. T. (1993). Random coefficient models. New York: Oxford University Press.
Malouf, M., & A. Roth (1981). Disagreement in bargaining. Journal of Conflict Resolution, 25, 329–348.
Neale M. A., & Bazerman, M.H. (1983). The role of perspective taking ability in negotiating under different forms of arbitration. Industrial and Labor Relations Review, 36, 378–388.
Pecorino, P., & Van Boening, M. (2001). Bargaining and information: an empirical analysis of a multistage arbitration game. Journal of Labor Economics, 19, 922–948.
Shavell, S. (1982). Suit, settlement and trial: a theoretical analysis under alternative methods for the allocation of legal costs. Journal of Legal Studies, 11, 55–81.
Stevens, C. M. (1966). Is compulsory arbitration compatible with bargaining? Industrial Relations, 5, 38–52.
Wheeler, H. N. (1975). An analysis of firefighter strikes. Labor Law Journal, 26, 17–20.
Wheeler, H. N. (1978). How compulsory arbitration affects compromise activity. Industrial Relations, 17, 80–84.
Zeng, D.-Z. (2003). An amendment to final-offer arbitration. Mathematical Social Sciences, 46, 9–19.
Zeng, D.-Z. (2006). How powerful is arbitration procedure AFOA? International Review of Law and Economics, 26, 227–240.
Zeng, D.-Z., Nakamura, S., & Ibaraki, T. (1996). Double-offer arbitration. Mathematical Social Sciences, 31, 147–170.
Author information
Affiliations
Corresponding author
Additional information
JEL Classification C7, C9, J5, K4
Rights and permissions
About this article
Cite this article
Deck, C., Farmer, A. & Zeng, DZ. Amended final-offer arbitration over an uncertain value: A comparison with CA and FOA. Exp Econ 10, 439–454 (2007). https://doi.org/10.1007/s10683-006-9146-9
Received:
Revised:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10683-006-9146-9
Keywords
- Arbitration
- Bargaining
- Dispute resolution
- Experiments