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Binding Versus Final-Offer Arbitration: A Combination is Best

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Author Info

  • Steven J. Brams

    (Department of Politics, New York University, New York, New York 10003)

  • Samuel Merrill, III

    (Department of Mathematics and Computer Science, Wilkes College, Wilkes-Barre, Pennsylvania 18766)

Abstract

A new procedure is proposed for settling disputes which combines binding arbitration (BA) and final-offer arbitration (FOA). Unlike either of the two pure procedures, combined arbitration (CA) induces the two parties to converge in making their final offers. Under BA, the arbitrator's settlement is binding on the two sides; under FOA, the arbitrator chooses the final offer of the party closer to what he/she considers a fair settlement. Under CA, FOA is used if the arbitrator's notion of a fair settlement falls between the two final offers or if the final offers converge or crisscross; otherwise, BA is used. When modeled as a two-person, zero-sum game of imperfect information, in which the two parties make final offers to maximize their expected payoffs---based on their perception of the arbitrator's probability distribution of fair settlements---convergence is to the median and constitutes a global equilibrium if the probability distribution is continuous, unimodal, and symmetric about the median. When the distribution is not symmetric or the two parties have different distributions, alternative solutions are derived---including one based on the parties' being within a "critical distance" of each other---and illustrated by examples. Alternatives to the arbitrator's decision calculus are considered, and questions about applying the new arbitration procedure are discussed.

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File URL: http://dx.doi.org/10.1287/mnsc.32.10.1346
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 32 (1986)
Issue (Month): 10 (October)
Pages: 1346-1355

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Handle: RePEc:inm:ormnsc:v:32:y:1986:i:10:p:1346-1355

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Keywords: game theory; arbitration; bargaining;

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Cited by:
  1. Manzini, Paola & Mariotti, Marco, 2001. "Perfect Equilibria in a Model of Bargaining with Arbitration," Games and Economic Behavior, Elsevier, vol. 37(1), pages 170-195, October.
  2. Willson, Stephen J., 2000. "Axioms for the outcomes of negotiation in matrix games," Mathematical Social Sciences, Elsevier, vol. 39(3), pages 323-348, May.
  3. Zeng, Dao-Zhi & Nakamura, Shinya & Ibaraki, Toshihide, 1996. "Double-offer arbitration," Mathematical Social Sciences, Elsevier, vol. 31(3), pages 147-170, June.
  4. Salvador Barberà & Danilo Coelho, 2004. "On the rule of K names," Working Papers 264, Barcelona Graduate School of Economics.
  5. Deck, Cary A. & Farmer, Amy, 2009. "Strategic bidding and investments in final offer arbitration: Theory and experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 361-373, May.
  6. David Dickinson, 2004. "Bargaining Outcomes with Double-Offer Arbitration," Working Papers 04-19, Department of Economics, Appalachian State University.
  7. Charness, Gary & Kuhn, Peter J., 2010. "Lab Labor: What Can Labor Economists Learn from the Lab?," IZA Discussion Papers 4941, Institute for the Study of Labor (IZA).
  8. 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.
  9. Zeng, Dao-Zhi, 2006. "How powerful is arbitration procedure AFOA?," International Review of Law and Economics, Elsevier, vol. 26(2), pages 227-240, June.
  10. Mazalov, Vladimir & Tokareva, Julia, 2012. "Arbitration procedures with multiple arbitrators," European Journal of Operational Research, Elsevier, vol. 217(1), pages 198-203.
  11. Armstrong, Michael J. & Hurley, W. J., 2002. "Arbitration using the closest offer principle of arbitrator behavior," Mathematical Social Sciences, Elsevier, vol. 43(1), pages 19-26, January.
  12. Zeng, Dao-Zhi, 2003. "An amendment to final-offer arbitration," Mathematical Social Sciences, Elsevier, vol. 46(1), pages 9-19, August.
  13. Dickinson, David L., 2006. "The chilling effect of optimism: The case of final-offer arbitration," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 35(1), pages 17-30, February.
  14. 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.
  15. Wojciech Olszewski, 2011. "A Welfare Analysis of Arbitration," American Economic Journal: Microeconomics, American Economic Association, vol. 3(1), pages 174-213, February.

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