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Equilibrium Strategies for Final-Offer Arbitration: There is no Median Convergence

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Author Info

  • Steven J. Brams

    (New York University)

  • Samuel Merrill, III

    (Wilkes College)

Abstract

Final-offer arbitration is a procedure for settling disputes between two parties in which an arbitrator chooses the final offer of the party closest to what he considers a fair settlement. This procedure is modeled as a two-person, zero-sum game of imperfect information, in which the parties are assumed to know the probability distribution of the arbitrator's fair settlements and to make bids in an infinite strategy space that maximize their expected payoffs. Necessary and sufficient conditions for there to be local and global equilibria in pure strategies are derived, and necessary conditions for mixed strategies in a particular case are found. Such equilibria, when they exist in pure strategies, represent bids which are symmetric about the median and, for most common distributions, are separated from one another by two or more standard deviations. This finding suggests that final-offer arbitration may not accomplish its avowed purpose of inducing the two parties to converge on what they perceive to be the arbitrator's median fair settlement.

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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 29 (1983)
Issue (Month): 8 (August)
Pages: 927-941

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Handle: RePEc:inm:ormnsc:v:29:y:1983:i:8:p:927-941

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Related research

Keywords: games; group decisions;

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Citations

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Cited by:
  1. David Dickinson, 2005. "Bargaining Outcomes with Double-Offer Arbitration," Experimental Economics, Springer, vol. 8(2), pages 145-166, June.
  2. Wojciech Olszewski, 2011. "A Welfare Analysis of Arbitration," American Economic Journal: Microeconomics, American Economic Association, vol. 3(1), pages 174-213, February.
  3. Cary Deck & Amy Farmer & Dao-Zhi Zeng, 2007. "Amended final-offer arbitration over an uncertain value: A comparison with CA and FOA," Experimental Economics, Springer, vol. 10(4), pages 439-454, December.
  4. David Dickinson, 2003. "The Chilling Effect Of Optimism: The Case of Final-Offer Arbitration," Working Papers 2003-01, Utah State University, Department of Economics.
  5. Salvador Barberà & Danilo Coelho, 2004. "On the rule of K names," UFAE and IAE Working Papers 636.04, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC), revised 13 Mar 2007.
  6. James Adams & Samuel Merrill, 2013. "Policy-seeking candidates who value the valence attributes of the winner," Public Choice, Springer, vol. 155(1), pages 139-161, April.
  7. Charness, Gary & Kuhn, Peter, 2011. "Lab Labor: What Can Labor Economists Learn from the Lab?," Handbook of Labor Economics, Elsevier.
  8. Zeng, Dao-Zhi, 2003. "An amendment to final-offer arbitration," Mathematical Social Sciences, Elsevier, vol. 46(1), pages 9-19, August.
  9. Sansing, Richard, 1997. "Voluntary Binding Arbitration as an Alternative to Tax Court Litigation," National Tax Journal, National Tax Association, vol. 50(2), pages 279-96, June.
  10. Zeng, Dao-Zhi, 2006. "How powerful is arbitration procedure AFOA?," International Review of Law and Economics, Elsevier, vol. 26(2), pages 227-240, June.
  11. Mazalov, Vladimir & Tokareva, Julia, 2012. "Arbitration procedures with multiple arbitrators," European Journal of Operational Research, Elsevier, vol. 217(1), pages 198-203.
  12. Orley Ashenfelter & Janet Currie & Matthew Spiegel, 1989. "An Experimental Comparison of Alternative Arbitration Systems," UCLA Economics Working Papers 563, UCLA Department of Economics.
  13. Samuel Merrill & James Adams, 2007. "The effects of alternative power-sharing arrangements: Do “moderating” institutions moderate party strategies and government policy outputs?," Public Choice, Springer, vol. 131(3), pages 413-434, June.
  14. Hurley, W. J., 2003. "Effects of multiple arbitrators on final-offer arbitration settlements," European Journal of Operational Research, Elsevier, vol. 145(3), pages 660-664, March.
  15. Broughman, Brian, 2008. "Independent Directors and Board Control in Venture Finance," Berkeley Olin Program in Law & Economics, Working Paper Series qt9w966114, Berkeley Olin Program in Law & Economics.
  16. Zeng, Dao-Zhi & Nakamura, Shinya & Ibaraki, Toshihide, 1996. "Double-offer arbitration," Mathematical Social Sciences, Elsevier, vol. 31(3), pages 147-170, June.
  17. Anbarci, Nejat & Feltovich, Nick, 2012. "Bargaining with random implementation: An experimental study," Games and Economic Behavior, Elsevier, vol. 76(2), pages 495-514.

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