The chilling effect of optimism: The case of final-offer arbitration
AbstractThis article examines the incentive effects of final-offer arbitration (FOA) in the presence of optimistic disputants. Common disputant expectations about the likely arbitrator settlement preferences are not a necessary condition for equilibrium final offers. It is shown that equilibrium final offers can exist under at least two forms of disputant optimism, naÃ¯ve optimism and more sophisticated beliefs. Additionally, equilibrium final offers diverge more when disputants are optimistic than when they are not, and even more when optimism is naÃ¯ve as opposed to sophisticated. The implication is that FOA rules, though instituted to lessen the chilling effect of arbitration on negotiations, interact with optimistic beliefs in a way that worsens the chilling effect. Data from controlled laboratory experiments confirm that optimistic expectations increase the distance between the disputants final bargaining positions as well as the probability of dispute. These results highlight the importance of improving disputant expectations as an effective way of improving bargaining outcomes.
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Bibliographic InfoArticle provided by Elsevier in its journal The Journal of Socio-Economics.
Volume (Year): 35 (2006)
Issue (Month): 1 (February)
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Web page: http://www.elsevier.com/locate/inca/620175
Other versions of this item:
- David Dickinson, 2003. "The Chilling Effect Of Optimism: The Case of Final-Offer Arbitration," Working Papers 2003-01, Utah State University, Department of Economics.
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