Reputational Concerns and Bias in Arbitration

We analyze how reputational concerns of arbitrators affect the quality of their decision making. We assume that arbitrators differ in their ability to evaluate the correct decision and that information acquisition by arbitrators is costly and unobservable. We show that reputational concerns increase incentives for information acquisition but may induce the arbitrator to bias his decision towards one party in the dispute.This decision bias is greater when the dispute is confidential rather than when it is public, and the parties are more likely to choose confidentiality for less complex subject matters. In light of these results, we study the circumstances under which the parties to a contract choose to employ arbitration, rather than litigation in court, to resolve their disputes. We show that arbiration is more likely to be chosen by symmetric and long-lived parties.enough.