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Nonbinding Suggestions: The Relative Effects of Focal Points versus Uncertainty Reduction on Bargaining Outcomes

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  • David Dickinson
  • Lynn Hunnicutt

Abstract

This paper focuses on the effects of nonbinding recommendations on bargaining outcomes. Recommendations are theorized to have two effects: they can create a focal point for final bargaining positions, and they can decrease outcome uncertainty should dispute persist. While the focal point effect may help lower dispute rates, the uncertainty reduction effect is predicted to do the opposite for risk-averse bargainers. Which of these effects dominates is of critical importance in the optimal design of alternative dispute resolution (ADR) procedures, which are becoming increasingly utilized to help resolve disputes in a variety of settings. We theoretically examine the effects of recommendations on the bargaining contract zone. Our theoretical framework, which allows bargainers’ final positions to influence a binding outcome should negotiations fail, provides for a more stringent test of focal points than previously considered. We also present data from controlled laboratory bargaining experiments that are consistent with our model of recommendation effects. Recommendations are empirically shown to influence final bargaining positions and negotiated settlement values. Furthermore, dispute rates are significantly lower when one includes recommendations, even where the recommendation is completely ignored in final-stage arbitration. This highlights a potentially significant role for the use of nonbinding procedures, such as mediation, as a preliminary stage in developing more efficient ADR procedures.

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File URL: http://econ.appstate.edu/RePEc/pdf/wp0513.pdf
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Bibliographic Info

Paper provided by Department of Economics, Appalachian State University in its series Working Papers with number 05-13.

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Date of creation: 2005
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Handle: RePEc:apl:wpaper:05-13

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Web page: http://www.business.appstate.edu/departments/economics/
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  1. Tracy, Joseph S, 1987. "An Empirical Test of an Asymmetric Information Model of Strikes," Journal of Labor Economics, University of Chicago Press, vol. 5(2), pages 149-73, April.
  2. Peter Cramton, 1992. "Strategic Delay in Bargaining with Two-Sided Uncertainty," Papers of Peter Cramton 92res, University of Maryland, Department of Economics - Peter Cramton, revised 09 Jun 1998.
  3. Roth, Alvin E & Murnighan, J Keith & Schoumaker, Francoise, 1988. "The Deadline Effect in Bargaining: Some Experimental Evidence," American Economic Review, American Economic Association, vol. 78(4), pages 806-23, September.
  4. Andrew Schotter, 2003. "Decision Making with Naive Advice," American Economic Review, American Economic Association, vol. 93(2), pages 196-201, May.
  5. Farber, Henry S & Bazerman, Max H, 1987. "Why Is There Disagreement in Bargaining?," American Economic Review, American Economic Association, vol. 77(2), pages 347-52, May.
  6. Ashenfelter, O. & Currie, J. & Farber, H.S., 1990. "An Experimental Comparison Of Dispute Rates In Alternative Arbritation Systems," Working papers 562, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Bacharach, Michael & Bernasconi, Michele, 1997. "The Variable Frame Theory of Focal Points: An Experimental Study," Games and Economic Behavior, Elsevier, vol. 19(1), pages 1-45, April.
  8. Grether, David M., . "Bayes Rule as a Descriptive Model: The Representativeness Heuristic," Working Papers 245, California Institute of Technology, Division of the Humanities and Social Sciences.
  9. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  10. David L. Dickinson & Lynn Hunnicutt, 2005. "Does Fact-Finding Promote Settlement? Theory and a Test," Economic Inquiry, Western Economic Association International, vol. 43(2), pages 401-416, April.
  11. Maarten Janssen, 2001. "Rationalizing Focal Points," Theory and Decision, Springer, vol. 50(2), pages 119-148, March.
  12. Linda Babcock & George Loewenstein, 1997. "Explaining Bargaining Impasse: The Role of Self-Serving Biases," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 109-126, Winter.
  13. 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.
  14. 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.
  15. Schotter, Andrew & Sopher, Barry, 2007. "Advice and behavior in intergenerational ultimatum games: An experimental approach," Games and Economic Behavior, Elsevier, vol. 58(2), pages 365-393, February.
  16. Tracy, Joseph S, 1986. "An Investigation into the Determinants of U.S. Strike Activity," American Economic Review, American Economic Association, vol. 76(3), pages 423-36, June.
  17. Sugden, Robert, 1995. "A Theory of Focal Points," Economic Journal, Royal Economic Society, vol. 105(430), pages 533-50, May.
  18. David L. Dickinson, 2005. "The Effects of Beliefs versus Risk Preferences on Bargaining Outcomes," Working Papers 05-17, Department of Economics, Appalachian State University.
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