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A Welfare Analysis of Arbitration

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  • Wojciech Olszewski
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    Abstract

    The paper compares conventional and final-offer arbitration. One party is supposed to make a payment to another party, whose amount depends on a state. Under one scenario, parties obtain signals about the state, which cannot be recognized by the opponents. If the arbitrator's ability of recognizing signals is high, the frequency of requesting arbitration is lower under conventional than under final-offer arbitration. If this ability is low, final-offer arbitration dominates conventional arbitration in quite a similar sense. Under the second scenario, parties believe that their opponents have wrong signals. Then, conventional arbitration approximates the original outcome better than final-offer arbitration. (JEL C78, D82, D86, J52)

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mic.3.1.174
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    Bibliographic Info

    Article provided by American Economic Association in its journal American Economic Journal: Microeconomics.

    Volume (Year): 3 (2011)
    Issue (Month): 1 (February)
    Pages: 174-213

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    Handle: RePEc:aea:aejmic:v:3:y:2011:i:1:p:174-213

    Note: DOI: 10.1257/mic.3.1.174
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    References

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    1. Brams, Steven J. & Merrill, Samuel III, 1984. "Binding Versus Final-Offer Arbitration: A Combination is Best," Working Papers 84-07, C.V. Starr Center for Applied Economics, New York University.
    2. Amy Farmer & Paul Pecorino, 2003. "Bargaining with Voluntary Transmission of Private Information: Does the Use of Final Offer Arbitration Impede Settlement?," Journal of Law, Economics and Organization, Oxford University Press, vol. 19(1), pages 64-82, April.
    3. Robert Gibbons, 1989. "Learning In Equilibrium Models of Arbitration," NBER Working Papers 2547, National Bureau of Economic Research, Inc.
    4. Farmer, Amy & Pecorino, Paul, 1998. "Bargaining with Informative Offers: An Analysis of Final-Offer Arbitration," The Journal of Legal Studies, University of Chicago Press, vol. 27(2), pages 415-32, June.
    5. Steven J. Brams & Samuel Merrill, III, 1983. "Equilibrium Strategies for Final-Offer Arbitration: There is no Median Convergence," Management Science, INFORMS, vol. 29(8), pages 927-941, August.
    6. Henry S. Farber & Harry C. Katz, 1979. "Interest arbitration, outcomes, and the incentive to bargain," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 33(1), pages 55-63, October.
    7. Farber, Henry S & Bazerman, Max H, 1986. "The General Basis of Arbitrator Behavior: An Empirical Analysis of Conventional and Final-Offer Arbitration," Econometrica, Econometric Society, vol. 54(4), pages 819-44, July.
    8. Farber, Henry S & Bazerman, Max H, 1986. "The General Basis of Arbitrator Behavior: An Empirical Analysis of Conventional and Final-Offer Arbitration," Econometrica, Econometric Society, vol. 54(6), pages 1503-28, November.
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