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Compulsory Arbitration, Arbitral Risk and Negotiated Settlements: A Case Study in Bargaining under Imperfect Information

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  • Vincent P. Crawford

Abstract

The effect of conventional and final-offer compulsory arbitration on negotiated settlements is characterized, using Nash's variable-threats bargaining solution, with particular attention to the interaction between arbitral risk and bargainers' risk preferences. When there is no arbitral risk, both schemes are shown to have the same effect on negotiated settlements under very general conditions, even when bargaining is over several issues. Whether or not there is arbitral risk, negotiated settlements favour a bargainer more if his opponent is more risk-averse. On the other hand, increases in arbitral risk need not improve the position of the less risk-averse bargainer. As a by-product of the analysis, Kihlstrom, Roth and Schmeidler's risk-sensitivity results for the Nash and Raiffa-Kalai-Smorodinsky solutions are generalized from fixed-threats to variable-threats bargaining.

Suggested Citation

  • Vincent P. Crawford, 1982. "Compulsory Arbitration, Arbitral Risk and Negotiated Settlements: A Case Study in Bargaining under Imperfect Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(1), pages 69-82.
    • Handle: RePEc:oup:restud:v:49:y:1982:i:1:p:69-82.
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    File URL: http://hdl.handle.net/10.2307/2297141
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    Cited by:

    1. Marselli, Riccardo & McCannon, Bryan C. & Vannini, Marco, 2015. "Bargaining in the shadow of arbitration," Journal of Economic Behavior & Organization, Elsevier, vol. 117(C), pages 356-368.
    2. Andrew Friedson & Thomas Kniesner, 2012. "Losers and losers: Some demographics of medical malpractice tort reforms," Journal of Risk and Uncertainty, Springer, vol. 45(2), pages 115-133, October.
    3. Gibbons, Robert, 1988. "Learning in Equilibrium Models of Arbitration," American Economic Review, American Economic Association, vol. 78(5), pages 896-912, December.
    4. Phillip A. Miller, 2000. "A Theoretical and Empirical Comparison of Free Agent and Arbitration‐Eligible Salaries Negotiated in Major League Baseball," Southern Economic Journal, John Wiley & Sons, vol. 67(1), pages 87-104, July.
    5. Phillip A. Miller, 2000. "An Analysis of Final Offers Chosen in Baseball's Arbitration System," Journal of Sports Economics, , vol. 1(1), pages 39-55, February.
    6. Bolton, Gary E. & Katok, Elena, 1998. "Reinterpreting Arbitration's Narcotic Effect: An Experimental Study of Learning in Repeated Bargaining," Games and Economic Behavior, Elsevier, vol. 25(1), pages 1-33, October.
    7. Nathalie Chappe, 2001. "L'analyse économique d'un mode de résolution des litiges : l'arbitrage," Revue Française d'Économie, Programme National Persée, vol. 15(4), pages 187-208.
    8. Eran Hanany & D. Marc Kilgour & Yigal Gerchak, 2007. "Final-Offer Arbitration and Risk Aversion in Bargaining," Management Science, INFORMS, vol. 53(11), pages 1785-1792, November.
    9. Henry S. Farber & Michelle J. White, 1990. "Medical Malpractice: An Empirical Examination of the Litigation Process," NBER Working Papers 3428, National Bureau of Economic Research, Inc.
    10. Bottom, William P., 1998. "Negotiator Risk: Sources of Uncertainty and the Impact of Reference Points on Negotiated Agreements," Organizational Behavior and Human Decision Processes, Elsevier, vol. 76(2), pages 89-112, November.

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